sikwin: Kelly formula risk assessment

The Kelly Formula stands out as the most efficient strategy for managing money, especially for those looking to maximize their bankroll growth with successful bets.

Sikwin defines the Kelly formula as a method for determining the portion of your bankroll that can lead to exponential growth when betting on higher-than-expected odds.

Introduced in 1956 by John Kelly during his tenure at AT&T Bell Laboratories, this formula offers a financially sound and mathematically precise approach to determining the optimal betting amount. It considers the anticipated ratio of reward to risk, aiming to enhance the overall growth rate of the invested sum. This can be expressed with the equation:

Kelly Betting Percentage = (Advantage – 1) / (Odds – 1)

Here, “Advantage” represents the edge you perceive over the bookmaker’s actual odds. For instance, if you assess fair odds for an outcome at 2.00 (equating to a 50% probability of success), but the bookmaker offers odds of 2.10, your advantage computes to 2.10/2.00 = 1.05.

“Advantage” essentially denotes expected value. The odds in the formula should be in decimal format. Therefore, in this example, the Kelly bet percentage is 0.05 or 5%.

The Kelly Formula operates as a form of proportional betting, where the bet size is a percentage of your total bankroll. As your bankroll fluctuates, so too will your bet amount. This is contrary to the fixed bet method, which employs a set bet amount.

What distinguishes Kelly’s formula is its consideration of both the magnitude of your perceived edge and the odds of your bet. A greater edge and/or tighter betting odds will entail a higher risk.

Calculating Kelly betting percentages can be challenging when wagering on multiple outcomes or matches simultaneously. Pinnacle has previously addressed this issue in an article. However, for the purpose of this article, we will focus solely on the simplified Kelly formula applicable to single bets.