The Kelly Criterion is a mathematical formula used in betting to determine the optimal size of a series of bets. It helps balance risk and reward by considering both the probability of winning and the potential return.

  • Origin: Developed by John L. Kelly Jr. in 1956, it was initially designed for telecommunications but quickly found applications in finance and gambling.
  • Formula: The basic formula is:
    f* = (bp – q) / b, where:

    • f* is the fraction of the current bankroll to wager.
    • b is the multiple of the bet you can win.
    • p is the probability of winning.
    • q is the probability of losing, which is 1 – p.
  • Advantages: It maximizes long-term growth of your bankroll and minimizes the risk of ruin.
  • Drawbacks: Requires accurate probability estimates which can be difficult to determine.

In conclusion, understanding and applying the Kelly Criterion can significantly improve your betting strategy by optimizing the size of your bets based on the probability of winning and potential returns.