The Kelly Criterion

Talk to most successful gamblers and one of the fundamental factors which they believe separates them from losing punters is money management. Losing runs happen to everyone however good you are so it is important to have a staking plan that means that your bankroll is not wiped out when these inevitable losing runs occur.

So how much should you stake on each selection? The Kelly Criterion could be the answer.

John Kelly came up with his formula in 1956, and it is now seen as the optimal way to use your money most effectively at the same time as protecting your initial bankroll. So what is the Kelly Criterion and do you calculate it?
In simple terms it works like this:

1, Work out the chance, in % terms, that you think the horse has of winning;
2, Multiply this by the horse’s chance according to its actual odds;
3, Subtract the probability, again in % terms, you believe the horse has of losing; and
4, Divide the result of the above by the horse’s actual odds.

The result is the % of your betting capital you should risk.
This can also be expressed as: (((X*Z) – Y )/Z) = % of bank risked, where X is the % chance of success, Y is the % chance of failure (equal to 100 minus X), and Z is the horse’s actual fractional odds (or decimal odds minus one).

In an example in which you think a horse should be 6 to 4 (40% chance of winning) and its odds are 5/2 (or 2.5 decimally), the equation gives you (((40*2.5) – 60)/2) = 16% of your bank.
If you want to set up a spreadsheet to calculate this for you, the spreadsheet would look like this:




Some betting syndicates which have multi million pound bankrolls use a proportion of the suggested stake. For instance the Bill Benter Hong Kong Betting syndicate who are massively successful are known to use “Half-Kelly”, It is mathematically sub-optimal but seemingly a sensible ploy in reality.

Nonetheless, the basic principle of the Kelly Criterion is that you should stake according to the edge you have and the likelihood of the event occurring is sound and that should be the basis of any bankroll betting decisions you make. Also the fact that you are only ever using a percentage of your bankroll means that you are never going to completely exhaust all your money!