The Kelly strategy is a type of gambling strategy that was created by J.L. Kelly Jr. in 1956 to help maximize a series of bets. It is known by several names—Kelly criterion or Kelly bet, in addition to the strategy name.
In short, the Kelly strategy is a way for gamblers (or investors in the stock market) to scrutinize the risks and rewards of any bet or investment. The specific formula is as follows: f* = bp-q/b = p (b+1) – 1/b. f* represents the amount of the bet or the current bankroll. The letter b stands for the odds received on the wager, or how much money you could win in addition to the money you’ve wagered. The probability of winning is indicated by the letter p, and q is the probability of losing.
For example, if a bet has a 20% chance of winning, then p = 0.20 and q = 0.80. In this particular case, 0.2×4.5 + 0.8×-1 = 0.1. As such, the suggested Kelly bet would be 2.22%, or 0.1/4.5.
This formula must be followed in order for the Kelly strategy to work. In the case of a gambler betting on a certain sporting event or card game, this type of bet is used to maximize bank roll growth. However, it also introduces more volatility that can cause short-term bankroll decline. It is a system designed with long-term profitability in mind, as opposed to immediate or short-term gains. In this respect, it shares similarities with value betting.
The best option is usually to bet less than the full Kelly amount. Even if this does lower growth, it also reduces the risk of losing higher sums of money quickly. By using the above formula, you can help determine how much or how little you should bet in a given situation. The Kelly strategy helps many professional gamblers calculate how much they should wager on any given bet, even if the odds are in their favor. This method also helps them even if they are winning, because it allows them to continue to bet even as they are winning pots, and thus capitalizing on their winning streak—and their bankroll.
In the future, we will provide a Kelly strategy calculator that should help simplify the process for those of you who might be math-challenged. This type of calculator can take your information—like your gambling bankroll, the odds of a particular game or bet, your odds of winning, the minimum bet allowed and what type of currency you’re using.
Of course, gambling is never a 100% guarantee so you should keep that in mind, even when using tools like the Kelly bet to maximize your winnings. Still, it’s a good way to do your research and help ensure you have a positive experience when making bets or investments.