Bankroll Management: The Kelly Criterion in Sports Betting

When we speak about the long term success of a betting system, a major component that needs to be thoroughly planned out and implemented is bankroll management.  Not just any bankroll management either.  Successful sports bettors have solid, unbending rules in place as part of their system.  They implement these rules along with the rules for picking the sports plays they wish to wager on.  They should not waiver from the plan.  The Kelly Criterion in sports betting is just one of the bankroll management solutions that is currently being used by many handicappers and is definitely worth considering when devising your own money management strategy to follow along the way.

Previously, I have written an article on bankroll management.  You can read that article here.  In that article I discuss the flat betting approach, the variable betting approach and the Kelly Criterion approach.  For this article, I am going to further focus on the sports betting Kelly Criterion approach, as it is a very solid approach in my opinion.

About John Larry Kelly, Jr. – The Gentleman Behind the Formula

John Larry Kelly, Jr. was born in Corsicana, Texas on December 26, 1923.  He devoted four years of his life in the US Navy as a pilot and served in the World War II.  Kelly studied at the University of Texas at Austin and earned a PhD in Physics in 1953.  After graduation, he worked in the oil industry.  He would later change jobs and became employed with Bell Labs in Murray Hill, New Jersey.  During this time he would devise a formula as part of an article published in an 1956 issue of the Bell System Technical Journal.  That article was entitled  “A New Interpretation of Information Rate”.  That formula would become known as the Kelly Criterion.  Many sports bettors and Wall Street investors including Warren Buffet are advocates of this theory in terms of bankroll management.  John Kelly died of a stroke in 1965, but his criterion remains imperative to many.

 

Why Is Bankroll Management Important in Sports Betting?

So, why is bankroll management important in sports betting?  Sounds like a silly question really.  After all, bankroll management is imperative in pretty much everything we do.  If your salary from work is $50,000 per year, we would obviously like to budget and make that $50,000 work best it can.  After all, budgeting enables you to generate a solid spending plan for the money you’ve earned.  Spend a little here.  Save a little there.

In sports betting, the same can be said.  As our bankroll grows, so does the amount we wager per play.  If we are in the midst of a losing streak, we may wager less per play and have our bankroll sustain longer.  Solid bankroll management is a key component to becoming a profitable sports handicapper.  Without a solid bankroll management system in place and the unwavering ability/mindset to stick with that solid system, you could end up squandering bankroll despite sustaining a decent winning percentage.

If we wish to become an effective long-term sports handicapper (and that is the goal, correct?), bankroll management is just as fundamental as selecting winners.  We never want to be reckless with bankroll.  Never.

The Mathematics Behind the Kelly Criterion

So, let’s get back to the Kelly Criterion in sports betting.  The Kelly Criterion is used to control the size of any potential wager.  The mathematical equation is as follows:

(bp-q) / b =f

Where “b” is the multiple of our stake we can potentially win (decimal odds less 1). “P” is the probability of winning. Conversely, “q” is the probability of losing. And “f” is the fraction of our bankroll we wish to put at stake.

Let’s say we have a $1000 bankroll.  Let’s further say your well thought out and back tested handicapping system wins 55% of the time. Let’s say the Los Angeles Dodgers are favored with a money line of -110.  After dotting all your “I”s and crossing all your “t”s, your system has the dodgers winning.

In above equation:

b = 0.909 (-110 moneyline is 1.909 in decimal odds – 1 = 0.909)

p = .55 (or 55%)

q = .45 (or 45%)

(0.909 * .55 – .445) / .909 = .05495

Because our bankroll is $1000 we would hence wager ($1000 * .05495) or $54.95.

Note: A decent odds converter for decimal odds can be found here at actionnetwork.com.  Another can be found here at sportsbookreview.com.

Also, a decent calculator for the Kelly Criterion itself can be found here at sportsbookreview.com.

Potential Issues with the Kelly Criterion in Sports Betting

Utilizing the Kelly Criterion does not select the plays themselves.  It only provides you with a bankroll management strategy.  You will still need to heavily backtest your handicapping strategy and then use a bankroll management strategy (such as the Kelly Criterion) for a chance at sports betting success.  Regarding the Kelly Criterion, there are still blank spots in the equation that need to be worked out accurately.  Those variables are p (for the perceived probability of winning the wager) and q (for the perceived probability of losing the wager).  Your handicapping strategy will help devise these figures.

Furthermore, many believe that the Kelly Criteria has the tendency to be overly aggressive.  In the above example, the $54.95 dollars is over 5% of our total bankroll.  Many handicappers will not wager more than 2% of their total bankroll on a single play.  For this particular reason, many bettors will utilize a strategy known as a fractional Kelly.  A fractional Kelly simply uses a fractional amount (usually ½) of the stake devised by the Kelly Criterion.

Conclusion

When used correctly, the Kelly Criterion can help find wagers that offer a distinct edge over the sportsbook you are wagering with and, conversely, find those bets that are not in your favor and should be avoided.  Whether you decide to incorporate the Kelly Criterion, a fractional Kelly, a flat betting approach, or a variable betting strategy into your system, do it.  Plain and simple.  A bankroll management blueprint is vital and should be required for any decent handicapper in order to better manage the risk involved.

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