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Kelly Criterion

Kelly criterion - financial betting strategy developed by John L. Kelly in 1956.

This strategy determines betting sums in percentage depending on your money amount. However it may happen that a gambler's bet is less than the minimal one at bookmaking office. This strategy is complicated because it requires a correct estimation of probabilistic outcome.

The formula for calculating the optimal betting sum:

\frac{K \cdot V - 1}{K - 1} = C

K – bookmaking index

V – event estimation by a gambler

C – next bet sum index

Sample:

  • Your bank: $1,000
  • Bookmaking index: 3
  • Your event outcome estimation: 0.4
C = (3\cdot 0.4 - 1)/(3-1) = 0.1

1000 x 0.1 = 100 Gambler's bet.

Kelly criterion is used not only for betting on sport events outcome, but also in the exchange market. A gambler faces the following problems when using this method:

1. If a gambler over-estimates the outcome, he loses more money, and if the outcome is under-estimated, a gambler is unable to receive the gain he expected to get.

2. Using this method a gambler should bet on events over-estimated by a bookmaker. For example, if he has estimated the outcome in 50%, then bookmaking index must be more than 2.

In case of a correct events estimation a gambler is unable to increase the bank fast, as every won bet will bring approximately 5% gain.

Due to the fact that accurate event outcome estimation is too complicated, not many gamblers dare to use this strategy in real betting.







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