Winning plays are only half the battle in sports wagering. You also need to keep your emotions in check. And you need a disciplined framework to grow your capital while keeping your downside risk exposure under control.
Kelly Criterion
Many are familiar with the Kelly Criterion. It was developed by John Kelly, a Bell Labs engineer in the 1950s, for dealing with signal noise issues. Since then, it has been adopted by professional blackjack players and others to maximize the expected growth of their bankroll.
Wagering Percentage
Kelly tells us to wager an amount equal to your advantage. For example, if your ROI per wager is 10%, then that would be the percentage of bankroll you bet on each play according to Kelly. A fraction of this amount is usually wagered to reduce bankroll volatility and to account for errors in estimating your advantage. Fractional Kelly (often 50%) is used even with blackjack where one’s advantage is well-known. Your advantage in sports wagering is usually less certain. A Kelly fraction of 33% or 25% would be more appropriate with sports.
But that doesn’t resonate with some bettors. An associate of mine named Dan met with prominent bettor Tony Salinas some years ago. Dan wanted to know how Salinas managed his bankroll. Here is their conversation:
Dan: Mr.Salinas, if you had a bankroll of $20,000, how much would you wager if you really liked a game?
Salinas: $40,000.
Dan: But your bankroll is $20,000?
Salinas: If I really liked a game, I would borrow another $20,000.
The Kelly criterion is an aggressive approach, but not that aggressive You can go bust with a positive expectation if you wager too aggressively. If you cannot accurately estimate your advantage, then a Kelly approach can be dangerous. Former private equity manager turned successful sports bettor, Dave Halpern, suggests limiting your wagers to no more than 5% of your bankroll. Lem Banker also recommends wagering no more than 5% of your bankroll on any one play and no more than 25% of your bankroll on any one day. I think a maximum of 3% per play is more prudent, especially when you have simultaneous wages.
You should also reduce your bet size when you have a number of simultaneous wagers. Here is a calculator by Ganchrow to help determine bet sizing with multiple plays.
A study showed that 56% of sports bettors think they are winners, but only about 1% really are. If you are not confident of your results, then you should limit your bankroll to an amount that you won’t regret losing. Your bet size should not exceed 1% of your bankroll. Better yet, don’t wager at all until you are confident you have a positive expectation.
Even if you have a sound edge, the volatility of Kelly wagering may be problematic. When running a simulation with a 3% to 10% edge, the chance of our bankroll being down 50% after 500 bets was 11% at full Kelly, 1.9% at half Kelly, and 0.4% at 1/3 Kelly. At 1/3 Kelly, we give up about half of our expected bankroll growth, but the ride is much less scary.
We use a Kelly-hybrid approach by resizing our bets once a day rather than continually. This is called plateau or flat bets with resizing. It makes managing our bankroll easier and works well because of our conservative wagering approach. The best attitude is to look for reasons to decrease the size of your bet.
