The Kelly Criterion is a method of staking that is used by some of the biggest betting teams in the world. It is designed to grow your bankroll at the optimum rate. In other words, using this staking you should not be possible to grow your bankroll any faster!
In reality it is not quite this simple and there are a number of reasons that it does not work in quite this way. While it is not suitable for everyone it can be very effective if you are betting based on value odds.
So how does it work?
Effectively it works by placing bigger bets when the probability of the bet winning is higher, and less when the probability is lower. Because of this you need to have an odds line to work with in order to use it. These odds can be created by your tipster, a ratings service, from a free source such as the Racing Post or of course, yourself!
The scope of the calculations are outside of this article but a quick Google and you can find many websites that provide calculators that do the calculations for you. An overview is…
- Take your odds and compare them to the betting odds available
- If there is value you use the Kelly Criterion to work out what percentage of your bankroll you should be betting for maximum growth
- You place your bets!
The big question is should we use the Kelly Criterion to work out our stake size?
Well the answer is yes and no. There is no doubt that if you have an accurate odds line then you should certainly be using Kelly, but therein lies the problem. Creating an accurate odds line is very difficult.
The process of deciding how much you should bet using the Kelly Criterion does not take into account the possibility that your odds will not be 100% accurate, and if they are slightly wrong then this will affect the growth of your bankroll negatively. The more inaccurate your odds line is, then the more this is going to affect the growth of your bankroll.
Major teams get around this by betting what is known as a fractional Kelly. They work out the percentage of bankroll they should be betting and then half or quarter it and bet that amount instead. Of course they have very accurate odds lines to start with and so this method maximises their bankroll growth potential. Unfortunately that is not all that is troublesome with the Kelly Criterion when using it for betting.
It also does not take into the account that it is impossible to go negative and then come back from it. i.e. it assumes that you can lose your bankroll and continue to bet to come back.
All this means that while the growth is optimal the variance can be very high, and this can make you lose your bankroll. If it was possible to continue betting after losing your bankroll then it would be true but, by definition, this is impossible. Even using a fractional Kelly does not help unless we have a very accurate odds line because any mistake in your odds will reflect badly using this method.
However there is a way to use this method very effectively and negate all these problems!
Let us remind ourselves of the problems inherent in the Kelly Criterion…
- You need to have very accurate probabilities of the chance of winning
- You need to be able to go into negative equity and come back
We already know that we can get around the second issue by betting a fraction of the amount suggested. To get around the first we need to have a very accurate probability of winning. This is going to be very difficult to get unless you are a statistician, work with them or purchase figures that are highly accurate (and probably highly expensive).
Instead of trying to get the probability of each horses chance of winning how about we work it on the chances of doubling our bankroll?
If we split our bankroll into multiple smaller bankrolls, maybe 5 or 10, and then we split each of these into the units we want and flat bet e.g. 50 units and 1 unit bets.
Our aim would be to either double or lose that bankroll. If we double the bankroll then we add it back to the total and re-divide into smaller amounts and start again. If we lose it then take another of our bankrolls with the same aim.
How long do you think that it will take to work out what your chances of doubling y0ur bankroll are?
Not very long. Now we have an accurate chance of winning and we can then use the Kelly Criterion to figure out what percentage we should take of our main bankroll for each of our smaller bankrolls!
As always with racing, the key to success is thinking outside the box.