I Used to Be a Gut Bettor
I'll admit it — even after years on the trading floor, I used to size my sports bets by feel. "I really like the Chiefs this week" meant I'd bet big. "Eh, maybe the Packers" meant a small play. That's not a strategy. That's gambling.
Then I remembered something from my trading days: the Kelly Criterion.
What Is the Kelly Criterion?
The Kelly Criterion is a mathematical formula that tells you the optimal percentage of your bankroll to wager on any given bet. It was developed by John Kelly at Bell Labs in 1956, and it's been used by professional gamblers and traders ever since.
The formula:
Kelly % = (bp - q) / b
Where: - b = the decimal odds - 1 (your potential profit per dollar wagered) - p = your estimated probability of winning - q = your estimated probability of losing (1 - p)
A Real Example
Let's say the Chiefs are -150 favorites (implied probability: 60%), but your analysis gives them a 65% chance of winning.
- b = (100/150) = 0.667
- p = 0.65
- q = 0.35
Kelly % = (0.667 × 0.65 - 0.35) / 0.667 = 0.125 or 12.5%
So you'd wager 12.5% of your bankroll. But here's the key: most professionals use half-Kelly or quarter-Kelly to reduce variance. I personally use quarter-Kelly for sports bets.
Why It Works
The Kelly Criterion does two critical things: 1. It prevents ruin. You'll never bet 100% of your bankroll on a single play. 2. It maximizes long-term growth. Over hundreds of bets, proper sizing compounds your edge.
The Emotional Component
The hardest part isn't the math — it's following it. When you're on a hot streak, Kelly might tell you to bet only 3% of your bankroll. Your gut says "go bigger." Ignore your gut. The formula exists precisely because human emotion is terrible at sizing risk.
My Results
Since implementing quarter-Kelly sizing two years ago, my bankroll has grown 340% with a max drawdown of only 18%. Before Kelly? I'd swing between doubling my money and losing half of it every month.
*— Pete Najarian*
