What Is the Kelly Criterion?
The Kelly Criterion is a formula for calculating the optimal bet size to maximise long-term bankroll growth. Developed by John Kelly at Bell Labs in 1956, it's been used by professional gamblers and investors ever since — most famously by the card counters of the MIT Blackjack Team and quantitative hedge funds.
The formula: f = (bp - q) / b
- f = fraction of bankroll to bet
- b = net odds (decimal odds minus 1)
- p = probability of winning
- q = probability of losing (1 - p)
A Worked Example
Your model says a team has a 70% chance of winning. The bookmaker is offering $2.00.
- b = 2.00 - 1 = 1.0
- p = 0.70
- q = 0.30
- f = (1.0 × 0.70 - 0.30) / 1.0 = 0.40
Full Kelly says bet 40% of your bankroll. On a $1,000 bankroll, that's $400 on a single bet. Most people's reaction to this is correct: that's insane.
Why Full Kelly Is Too Aggressive
Full Kelly maximises geometric growth rate — but it produces enormous variance along the way. On the path to maximum growth, you'll experience drawdowns that would make most punters quit or blow their discipline.
There's also a more fundamental problem: your probability estimates are never perfectly accurate. If you estimate 70% but the true probability is 65%, your Kelly fraction is wrong — and overbetting relative to your true edge accelerates losses during bad runs.
Fractional Kelly — The Practical Approach
Most professional sports bettors use a fraction of Kelly — typically half Kelly or quarter Kelly. This sacrifices some theoretical growth rate in exchange for dramatically lower variance and a more survivable drawdown profile.
In practice, this often converges with simple flat staking at 1-2% of bankroll per unit — which is exactly what we recommend. At 65-85% model confidence, flat staking at 1-3 units (1-3% of bankroll) is roughly consistent with quarter to half Kelly sizing, depending on the odds.
Should You Calculate Kelly for Every Bet?
If you have accurate probability estimates and reliable odds data, yes — Kelly-based sizing is theoretically superior to flat staking. In practice, for most Australian sports bettors, the overhead of calculating Kelly fractions for every bet isn't worth it compared to simply following confidence-adjusted flat staking.
Our tip tiers (VALUE 1u / STRONG 2u / BANKER 3u) are designed to approximate this logic — higher confidence = larger stake, but capped at a sensible maximum to avoid Kelly's variance problem.
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