The Kelly Criterion is a sports betting system that helps you manage your money. A simple truth of sports betting is that it's the superior bettors who succeed, not the most competent handicappers. So, while it may be difficult to contain the snickering when someone says they have a handicapping system, a bit more respect must be shown to those who apply a system to betting.
Money Management
Often broadly defined as “money management,” any good betting system involves rules for discipline and restraint. But it was John Larry Kelly, Jr. (1923-1965), a scientist who worked at Bell Labs, who offered a specific method or “system” for betting. Known as the Kelly Criterion, Kelly Strategy, Kelly Formula or Kelly Bet, the system determines the optimal size for each of your betting units.
First described by J. L. Kelly, Jr. in a 1956 issue of the Bell System Technical Journal, the system employs a number of often complex mathematical formulas for different scenarios. Simplified so a greater number of gamblers could utilize Kelly's practices, the revised core principle of the Kelly System is that you always bet a fixed fraction of your bankroll. Admittedly, that doesn't sound like much of a breakthrough from the man who, in 1962, used a computer to synthesize speech, a technique that was later employed in the film, 2001: A Space Odyssey.
But Kelly added, “Bet the fraction of your bankroll that maximizes its growth rate. Growth rate is the expected logarithm of return, where return is payoff per dollar bet.”
Play A Percentage Of Your Bankroll
Okay, here's how it works: After each bet, you bet 10 percent of your remaining bankroll. Let's say that you begin the football season with a bankroll of $2,200. Your first bet would be 10 percent of $2,200 or $220. If you win, the 10/11 payoff odds give you a profit of $200 so your new bankroll is $2,400. Your second bet would be 10 percent of $240, or $240, and so on.
However, if you lose your first bet of $220 your bankroll would be reduced to $1,980 ($2,200 – $220 = $1,980). Your next bet would be 10 percent of $1,980, or $198. So, win or lose, you always risk 10 percent of your current bankroll.
Contrary to the often proffered ridiculous notion that you should bet more when you're losing to “get even,” with the Kelly System, the more you have, the more you bet, and the less you have, the less you bet.
Four core elements of the Kelly System should make it ideal for casual and recreational sports betting fans:
1) It forces a disciplined approach on the very gamblers who most need such guidance and restraint.
2) As demonstrated by several statistical analyses, the system will perform better over a long period of time than just about any other developed mathematical system.
3) When using the Kelly System, the expected number of bets necessary to reach a specified monetary goal is lower than with any other betting strategy.
4) Since you always bet a fixed fraction of your bankroll, it is almost impossible to tap out, giving the casual player what he wants most, action.
Did Kelly Practice His Criterion?
It is unknown if Kelly, who died of a stroke on a Manhattan sidewalk at the tender age of 41 in 1965, ever practiced what he preached. However, it is known that Claude Shannon, a colleague of Kelly at Bell Labs who teamed with Kelly to develop a game theory betting method, did try out the system in something more than a scientific setting.
Shannon and his wife Betty journeyed to Las Vegas with M.I.T. mathematician Ed Thorp (a little bit more about him later), attacking the roulette and blackjack tables using the Kelly System. They made a killing, the substance of which is detailed in the book, Fortune's Formula, by William Poundstone. Shannon and Thorp even applied the Kelly System to the stock market, again with great success.
Thorpe, for his part, in 1962 went on to write Beat the Dealer: A Winning Strategy for the Game of Twenty-One, the first book to mathematically prove that the house advantage in blackjack could be overcome by card counting.
Thorpe's book, in the wake of Kelly's landmark analysis on maximally investing money, proves that mathematical formulas and probability theory can be applied successfully to casino betting and sport betting.
