Criterion Kelly: description of strategy, formula, advantages and disadvantages

The interest of a person in quick earnings without unnecessary effort has led to the popularity of casinos and sweepstakes and other gambling. In most cases, bets are made based on intuition or completely randomly. However, some believe that you should not rely solely on fortune, but you can figure out what the stake will bring a win. For this, various mathematical formulas have been used. One such strategy is the Kelly test.

About strategy

This financial strategy was developed by John Kelly in 1956. Its essence is to determine the amount of the bet depending on the player's existing bank. The use of the strategy is rather complicated. And at first the probability of losses considerably exceeds the percentage of successful bets. In addition, it does not protect against defeat and does not guarantee that all bets calculated with its application will be winning. This applies to all other existing strategies. Throughout history, no one has ever succeeded in devising an ideal formula that allows you to always win in a casino, an exchange, or a sweepstakes.

The essence of Kelly's criterion is to calculate the outcome of the event on the basis of a correct analysis of various factors and the conclusion drawn on their basis. Own assessment of the development of events should differ from what others think, such as a bookmaker. First, you need to look for those bets that, according to the player, are overstated by bookmakers. If, according to the player, they are incorrect, then they need to make a bet, the size of which must be calculated using the formula.

Calculation formula

The size of the bet = (coefficient of the bookmaker's office * evaluation of the events of the player - 1) / (the coefficient of the bookmaker office is 1)

The evaluation of the player's events is entered into the formula in the form of a decimal number. That is, the probability expressed in percent should be divided by 100, and the resulting number is added to the formula.

How to count

One of the areas in which Kelly's criterion is often applied is in sports betting. Technically, it is not difficult to calculate a bet that can be betted.

The basis is the size of the player's money. For example, it is one thousand.

The bookmaker believes that the football club "A" will win against the club "B" and the coefficient is 2.0. The player believes that the bet is overstated. The reasons for why his point of view is different can be very different. For example, club "A" is in better physical shape, club "B" has several injured players, which can affect teamwork. Club "A" usually plays well in this part of the season. As a result of the analysis, the player thinks that the probability of winning club "A" is 58% (0.58).

The calculation will look like this:

(2.0 * 0.58-1) / (2-1) = 0.176

To translate into a monetary expression, the size of the bet must be multiplied by 100. As a result of the calculation using the Kelly criterion, the bet will be 176.

If the outcome is unfavorable, the next bet is calculated based on the remaining funds, that is, from 824.

Conditions for optimal calculations

One of the components of success is the correct assessment of the facts. For this it is recommended to conduct it, being in a good physical and psychological state. Fatigue, bad mood after a loss, euphoria after winning increase the opportunity to make a mistake with the evaluation of events, and Kelly's criterion will not be calculated correctly.

The probability that events will take shape in a certain way can not be 100% or close to this.

It is necessary to avoid low coefficients. It is desirable that they are not lower than 1.8. Otherwise, the gain will be negligible, and the analysis should be spent no less time.

Disadvantages of strategy

Kelly's criterion is a strategy that does not allow you to get rich instantly. According to experts, the average profit at the wound rate is 5%. Its increase is possible with constant correct prediction of events, which does not always happen. To do this, you need to gain experience, so newcomers are not advised to use this strategy.

To win more, you need to have a fairly good bank reserve. Experts say that it should be equal to at least 15 average player rates.

Benefits of strategy

The main advantage of Kelly's criterion is a pretty good defense against losing. If a person makes a mistake and loses a bet, then this is not all the money that he has. At the same time as the bank decreases, the size of the subsequent rate decreases. Therefore, you can play long enough. If the defeats are replaced by winnings, which happens almost always, then you can play almost indefinitely.

For those who have just started using the Kelly criterion method, it is recommended not to make a bet obtained as a result of calculation by the formula, it can be done slightly less or even halved. As you acquire the necessary knowledge in the field of estimating the coefficients of bookmakers and the development of an effective approach to analysis and prediction of events, the rate may be equal to the calculated one.

In addition, this strategy allows you to often earn. With proper analysis and calculations, a stable income is guaranteed. The higher the bank, the greater the rate that allows you to significantly increase the winnings. But the amount of loss in case of an error also increases.

Kelly's criterion is applied at the exchange, in the casino and to determine the rates for the results of the sporting events. Because of the complexity of the strategy, many players prefer to use other strategies that are no less effective. Thus the player is not obliged to be limited to using only one method of calculation, it is possible to use several simultaneously.