The Kelly criterion formula is an ingenious mathematical equation that has been found useful in various aspects of gambling, including horse racing, sports betting, and sometimes casino gaming. The formula also works for value investments and has been said to be used by notable investors, such as Warren Buffett.
Gamblers who value conservative gaming, i.e., managing their bankroll, appreciate Kelly criterion sports betting. Accurate prediction is hard, which is why wagering on casino games or sports is called a gamble. Things may or may not go your way, and most often, the latter happens.
Therefore, whatever money you have set aside for betting should be wisely utilized so you can withstand the uncertainty and randomness of gambling. You can call this “margin of safety”; this is exactly what the formula seeks to help you achieve.
In today’s casino news, we discuss the Kelly criterion formula, digging into its history and how it’s applied to betting.
Finding the Best Bet Size With the Kelly Criterion Formula
What is the Kelly criterion? The Kelly criterion is a mathematical equation that helps to determine the ideal bet size over a long period of gameplay. It balances gambling risks and profitability by stating how much you should bet based on the probability of winning. In simpler terms, the Kelly criterion helps you determine the percentage of your bankroll you should use to wager, considering the chances of success.
The formula states the following:
bp – q
K%= ⎯⎯⎯
b
K % = The Kelly percentage (the fraction of the bankroll to wager)
b = The return odds of a bet minus 1
p = Winning Probability
q = Losing Probability (1 – p)
The Kelly Criterion is calculated differently in casino gaming and in sporting betting.
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Calculating the Kelly Criterion in Casino Gaming
The Kelly criterion formula works if you have the necessary data. Most casino games are chanced-based. The only exceptions are poker and blackjack. Playing casino slots for real money, baccarat, and roulette are based on chance.
If we are to break down the Kelly criterion to fit into casino gaming, we will put it this way: (P – Q) / B
P= Winning Probability
Q = Losing Probability
B = Decimal odds -1.
Interpret the decimal odds as the minimum amount required for you to be able to place a wager.
Let’s say you are playing online roulette, the American version, and the minimum wager is $5. If you choose an inside bet, the probability of winning is about 46.37%, and the probability of losing is 53.63%.
To get the ideal bet size, follow the Kelly criterion (0.4637 – 0.5363) / 5-1 = 1.8% (ignoring the negative).
So, if you have $100 in your bankroll, the formula suggests you place $1.8 on an inside bet.
If you would like to approximate that, it would be $2. And note there is a house advantage on every wager placed.
So, generally speaking, the Kelly criterion formula does not work directly in casino chance games. You would often get a negative percentage.
Calculating the Kelly Criterion in Poker
The Kelly criterion bet-size technique is useful in poker to determine the buy-in amount. It reduces your chances of going broke. There is fully Kelly, half Kelly, and quarter Kelly. Whatever you get using the formula and then divided by two is called a “half Kelly”. When you divide the result by 4, it is called a quarter Kelly.
Some online websites have an automated system for calculating the Kelly percentage for poker gaming. The system asks you to enter the ROI (return on investment) you expect for the biggest poker winnings and your risk level, i.e., whether you want to go all in or half in.
However, this formula is not foolproof because of the different variables involved in poker gameplay.
Calculating the Kelly Criterion in Sports Betting
Kelly criterion sports betting works well because all the necessary data is often available.
For example, hypothetically, in Cardinals vs. 49ers, the Cardinals have odds of 1.96, and you handicap the team at 1.56, pushing your win probability to about 58%. Your bet size following the Kelly criterion formula will be:
b = 0.96 (1.96 – 1)
p = 0.58
q = 0.42 (1- 0.58)
K% : (0.96 x 0.58 – 0.42) / 0.96 = 0.14%
Bet size = 14% of your bankroll. So, out of $50, you should wager only $7. That is how to use Kelly criterion in sports betting.
History of the Kelly Criterion Formula
The Kelly criterion formula was created by an American scientist, John L. Kelly, in 1956. Kelly was a researcher at AT&T’s Bell Labs in New Jersey, and he developed the formula to combat the long-distance telephone signal noise issues they were facing. However, investors and bettors found it useful.
In the published paper titled “A New Interpretation of Information Rate,” Kelly wrote: “If the input symbols to a communication channel represent the outcomes of a chance event on which bets are available at odds consistent with their probabilities (i.e., “fair” odds), a gambler can use the knowledge given him by the received symbols to cause his money to grow exponentially.”
After reading this, we guess gamblers instantly loved his technique. Of course, every punter wanted to reduce losses and win as much as possible. They did not want to bet high in case of a loss or too low in case of a win.
Finding the balance is key, for which the Kelly criterion formula is a useful tool.
Wrapping It Up
The Kelly Criterion formula is a mathematical technique for determining how much of your bankroll you should wager based on your chances of winning. Its goal is to help you keep your money long-term while also making it grow, which is why investors use it. For gamblers, the Kelly Criterion works well for sports betting and sometimes poker, but not for chance-based casino games like slots and roulette.
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