What is the Kelly Criterion?

The Kelly Criterion is a mathematical formula designed to help you determine the optimal amount to bet in a gambling or investment scenario to maximize your long-term growth or expected return on investment while minimizing the risk of losing your entire bankroll.

How Does the Kelly Criterion Work?

The Kelly Criterion is based on your estimated probability of success, the odds you receive, and the size of your current bankroll. Here’s how it works:

1. Estimated Probability of Success: You start by assessing your estimated probability of success, which is the likelihood of your bet being successful. This should be expressed as a decimal between 0 and 1, where 0 means you expect no success, and 1 means you expect complete success.

2. Odds Received: You also need to consider the odds you’re receiving for your bet. This could be in various formats, such as decimal odds (e.g., 1.5), American odds (e.g., -150 or +150), or fractional odds (e.g., 3/1). In the Kelly Criterion Calculator, you can select the appropriate odds format.

3. Current Bankroll: You input the amount of money you currently have in your bankroll.

4. Calculate: Once you’ve provided your estimated probability of success, odds, and bankroll, you click the “Calculate” button in the Kelly Criterion Calculator.

5. Recommended Bet Size: The calculator then determines the optimal bet size, expressed as a percentage of your current bankroll. This is the amount you should wager on the given bet to maximize your expected long-term growth.

6. Interpreting the Result: If the recommended bet size is a positive percentage, it suggests you should bet that portion of your bankroll. However, if the recommended bet size is negative, it means you should not bet on this scenario because it’s not in your favor.