Currently, the climate for sports betting is as hot as it ever has been in world history. And from the moment the first bet was placed, it introduced a new landscape of probability, statistics, sharps and squares. The point of these episodic emails is to prevent you from being the latter. So today we will be talking about the Kelly Betting Criterion
If you have read the last episode in this series, the idea of an “edge” will be fresh in your head. Today I will be explaining to you how to capitalize on this edge and build your bankroll in an exponential manner.
Now in todays industry, you will see a lot of so called sports betting gurus telling you to bet a certain unit size on a game or prop. Even worse, some will tell you simply double your next bet size if you have lost your previous one to get even. Before I get into the numerous reasons why this is a HORRIBLE decision, let me get back on track.
The Kelly Betting Criterion is a formula that determines how to “correctly” size your bets according to your edge.
First lets start with an example. Suppose we are presented with a game in which the home favourite is priced at -450 across the board (81.8%), and you, the astute bettor that you are come along and view that home team to actually have a 90% chance of winning the game. Based off of the last episode, you would see an edge, make the bet, and have some excitement while watching the game.
But maybe if you really are an astute bettor, you are wondering, “how much should I wager on this team to win?”. This is exactly where the Kelly Betting Criteria comes in.
Below you will find the formula for this criteria, but don’t worry, I will talk about this in depth, as this is not the holy grail of bet sizing.
Firstly, you will need to convert the bet you are placing into its net decimal form. This is a fairly easy calculation and can be done by hand or better yet through one of the many calculators you can find on the internet. In our case for -450 this translates to net decimal odds of 0.22.
Next, the odds that our bet succeeds or the probability as we have deemed above is 90% or 0.9.
Finally the percentage that our bet does not win according to the above determination is 10% or 0.1.
Plugging in these values and calculating, we receive a value of 0.445. By multiplying this by your respective bankroll you are then at the optimal value to bet if all the parameters are correct.
However, before you start using this all over town, take a step back and think for a second. How likely would it be that you have a 44.5% edge on a bet? I’ll answer that for you.. VERY UNLIKELY. LIKE DO NOT BET THAT AMOUNT. THE MARKET IS TOO STRONG TO GIVE UP A 44.5% EDGE.
It is likely that your assessment on how likely the winning team will win is a little bit inflated, and most likely will be for a large time until you can develop a model that is more accurate.
But don’t worry! Although Kelly Betting in theory will exponentially grow your bankroll by capitalizing on your highest edges, it assumes an infinitely replenishable bankroll.
I can guarantee you no one has an infinitely replenishable bankroll, and that’s where people get into trouble.
Several professional bettors use a lower stake of Kelly known as quarter or half Kelly in which their risk of ruin significantly decreases. (i.e. the risk that you go broke by betting too much $$$)
Although sports betting is about capitalizing on your edges, perhaps a bigger aspect of it is the management of bankroll. Any professional bettor you talk to will stress the importance of bankroll management, especially in such a variable industry. Your bankroll is your toolset, and if you don’t take care of your tools, you will never be able to fix anything.
So there you have it, a proper way to size your bets corresponding to your edges on the game. If you’re interested in using a Kelly betting approach the next time you are gambling, there are plenty of automated ones on the internet just a few clicks away.(or you could do it the old fashioned way too!) And if you are interested in making one that suits excel, feel free to reach out and I can assist you with that!
Until next time!
See how fast you can hit these buttons! Can you hit them all at the same time? Who knows ! I appreciate if you do!