Kelly’s criterion

Kelly’s criterion

In this strategy the bank interest is not fixed and it depends on the correct determination of the event probability. Kelly’s criterion doesn’t permit bankruptcy, because it determines sizes of bets, depending on your cash. There is no risk of getting full bankruptcy. But the criterion demands proper evaluation of your chances for each event. According to this condition we get the optimal size of the bet, while using the next formula:

(Coefficient * prediction) – 1 / (coefficient -1)

For example, your bankroll is $10000, and the sum of event coefficient is 5.00, then your prediction will amount to 0.25 (25%). The result is 5.00 * 0.25 – 1) / (5.00 – 1) = 0.0625. This means that we should make a bet of $625 (0.0625 * $10000).

The main advantage of this strategy is that by decrease of the bankroll, less money is lost i.e. by your average bet of 10% from the bank, having lost 6 times in succession, you will have 48% from your initial bankroll.

But Kelly’s criterion cannot lead you to large profits. Your bankroll will grow only per 5% from your proper determination of the probability. If you set a goal, finish the game after you have achieved this goal. Only in such a way you can understand that your money has been earned. Many gamblers use the Kelly’s formula, but they consider it to be rather risky as it demands the proper evaluation of events chances. If you overestimate your chances, there is risk of losing your money, because the size of the bet, calculated according to the formula, will be rather large. You can use Kelly’s formula only for calculation of that how much you should bet on the game 2 in comparison with the game 1.