John Kelly - Kelly Criterion inventor

John Kelly

Kelly Criterion is widely known to casino players, financial betters and stock exchange brokers. In the financial world it is also widely known as the strategy of average geometric maximization of portfolio. We won’t go deep into finance, but will describe how this can be used in betting on basketball.

Initially the use of Kelly Criterion became popular in casino games since 1956. There are some similarities with a fixed bankroll percentage bets, but the system different from Martingale because here you should not increase the bet when you lost, but count the bet amount every time before you make one. There is a special formula that was introduced by a scientist John Kelly who worked in Bell Labs in the middle of twentieth century.

(coefficient * probability) – 1 / coefficient – 1

This formula should be used with care though. In order to succeed, you need to be able to calculate the right amount you want to invest. Your bankroll should equal to at least 15 initial bets. You define the initial bet – it should be an amount you can afford to lose. Don’t forget to take this as serious as possible.

For example, you decide that you don’t want to bet more than $10 at a time, which means that your bankroll should be no less than $10*15 = $150.

Kelly Criterion is developed for the events with exaggerated odds. As you may already know, you have a chance to earn some money when a bookmaker is underestimating a certain event. You should not place bets on events with odds like 1.2, cause those are minus bets in a long run. Look for yourself – if you make 10 bets for $10 on 1.2 odds, you will win on the average 70% of the time. This will leave you with only $84 and this will be a lucky case for you. This is why we need to look out for such events that you think are underestimated by the bookmaker.

Kelly Criterion – Practical Use

For example, you see an odds for Charlotte Bobcats to win at home against Spurs and it is as high as 5.85. You are sure that this time they should have a chance to win. You account this probability at 25% (0,25). Your bankroll is $150. Let’s calculate our bet using Kelly Criterion.

(5.85 * 0,25) – 1 / 5.85 – 1 = 0.46/4.85 = 0.094

Let’s multiply this by the bankroll – 0.094 * $150 = $14,1 – the sum we should bet.

If our bet wins, we’ll get $14,1 * 5.85 = $82.49 (clear profit of $68.39)

Don’t forget that the outsiders (the ones that are not favourites by the bookmaker odds) will not win often, not more than 30% of times. Let’s consider that we lost our first bet.

We choose a new event. Let’s say, Milwaukee Bucks are playing away at Miami Heat and the win odds are 6.35. We use the formula.

(6.35 * 0.25) – 1 / 6.35 – 1 = 0.58 / 5.35 = 0.108; 0.108 * $135.9 = $14.68 (our bet amount)

Let’s suppose this time we manage to win. Our winnings will be as big as $93.22. If we deduct the losses ($14.1 for the first bet and $14.68 for the second), we will get $64.44.

Please keep in mind that Kelly Criterion is designed for the high odds and underestimated bets, because even if we consider odds as high as 3.00, for example, our strategy would not be that positive.

More on John Kelly from Wikipedia.org:
John Larry Kelly Jr