The formula
The Kelly criterion tells you what share of the bank to stake: (chance × odds − 1) / (odds − 1). With a 55% chance at odds of 2.00, that is (0.55 × 2 − 1) / 1 = 10% of the bank. If the chance is estimated correctly, this stake grows the bank faster than any other.
The key words are “estimated correctly”. If the chance is overestimated even slightly, the stakes come out too big and the bank swings wildly.
What history shows
We took the bets where the best early price is 2% above the sharp line's fair price (10,646 of them; the same strategy as in the article on early odds, with a positive CLV) and ran a bank of 100 through all of them in order, staking in four different ways.
- 1% of the bank per bet — 1
- Quarter Kelly — 105
- Half Kelly — 64
- Full Kelly — 6
| Method | Final bank (from 100) | Deepest drawdown |
|---|---|---|
| 1% of the bank per bet | 1 | 100% |
| Quarter Kelly | 105 | 58% |
| Half Kelly | 64 | 85% |
| Full Kelly | 6 | 99% |
Full Kelly on these bets turns 100 into 6, with a drawdown of 99%: it treats the edge as exact, but the estimate of the chance is off, and the stakes come out too big. Quarter Kelly turns 100 into 105, with a drawdown of 58%. Staking 1% of the bank on every bet leaves 1: on long shots with a small edge, that stake is too big.
How to use it
- First you need an edge. Kelly without an edge is just a way to lose faster.
- Use a fraction of Kelly, a quarter or a half: it protects you against errors in your estimate of the chance.
- A flat stake of 1–2% of the bank is a simple, sensible option if you are not sure of your estimates.