The Kelly Betting Strategy System

Have you ever heard about the betting system called the J. Kelly System? Here we have a comprehensive explanation of what this system is about and how to implement it in your betting strategies.

Who is this J.L Kelly?…

… and what does he have to do with today’s esports betting?

John Larry Kelly Jr. 1923-1965, was an eccentric but gifted American professor who worked at the University of Texas, Austin, in the 1950s. He formulated a number of mathematically determined formulas in especially physics, and later he started to take interest in computer science and economics. Kelly had an interest in making money, so he started applying his mathematical skills to create profitable investment- and betting systems.

Now basically, all betting systems and strategies have flaws and not a single one can guarantee you constant profit. However, the Kelly system is the best to use, because it also teaches you how to gamble smart. So if you want to try a strategy and become a successful esports bettor, you should give the Kelly system a go.

What is the Kelly System?

In 1956, J.L Kelly found the mathematical solution, and published a betting- and investment system that was called The Kelly Criterion. The system aims to find the optimal way for financial growth while keeping the risk of bankruptcy as low as possible. Today this system is known as the Kelly system.

“The Kelly is a formula for bet sizing that leads almost surely (under the assumption of known expected returns) to higher wealth compared to any other strategy in the long run.” – The Kelly Criterion on Wikipedia

How does it work?

The principle of the system is that you only put a (small) percentage of your available capital at stake with each investment, or in betting on each bet. Regardless of whether you win or lose the bet, the percentage (if you practice the so-called “flat betting” where you do not differentiate between bets) of the size of the stake in relation to the bankroll remains the same. If you win your bet, your total bankroll will increase, and thus the next stake, even if it is the same percentage, will also grow.

Growth will initially seem slow. Let’s take an example:

You have a bankroll of 1.000 euros, and you chose to bet one percent per bet, which in this case is 10 euros. You place a bet at odds 2,00 and win. Thus, your bankroll is up to 1.010 euros (the stake is not profit and therefore is not added to the bankroll), which means that your next bet should not be 10 euros but 10,1 euros (one percent of 1.010 euros).

Scenario

Alternative money management systems

If you choose such a conservative model, it will of course take a while before things get serious, but on the contrary, losing your entire bankroll is almost an impossibility. If you lost the first bet, you would be left with 990 euros in the bankroll. The next bet would be 9.90 euros, and even if you continue to lose for a while, you would be practically sure not to lose your bankroll. If, for example, the bankroll is down to 500 euros, the size of each bet will be adjusted down to 5 euros.

Pretty boring maybe – but what is the money management alternative resulting in a halving of the bankroll with that many lost bets? I can easily point that out. With almost all other money management systems, that poor betting performance would have resulted in a loss of the entire bankroll long ago.

Bets with value

The abovementioned example illustrates an essential detail. The prerequisite for the successful implementation of the Kelly System is that equity (or expectation) is positive. That is to say that the esports bettor has to have a positive expectation with his or her bets, which does not mean that they optimistically expect/hope to win, but that he or she when for example placing bets at odds 2,00 will win more than 50 percent of the time.

In other words, the Kelly System’s premise is that the esports bettor plays bets with value (which is basically the same premise of all good systems, as betting with a consistent minus value regardless of the system, in the long run, will always lead to a loss of bankroll).

That was a look at the cons – that is, if you lose more bets than you win – which with the Kelly system is significantly less negative than with alternative money management systems. The great strength of the Kelly system is that it offers something to get through the bad slumps that all esports bettors will find themselves in.

The downside with the Kelly System

The real downside to the Kelly System is that just as the losses are limited, so are the earnings – or rather earnings are slower (than in other money management systems). You have to live with that, because successful betting is equal to betting in the long run, and while in the long run, it is obviously important to make a profit, and preferably as big a profit as possible, the most important thing is to not lose your bankroll.

Lots of otherwise seasoned esports bettors have over time had their bankroll eaten up by unfortunate periods where they win nothing. Not too smart of them as in 99 percent of all those cases, it would not have happened if Kelly’s instructions had been followed.

Leverage your stake according to equity & expectation

The basic principle of the Kelly System is that you leverage your stake at a percentage rate of success/failure according to your bankroll. In this way, you are protected against losing your bankroll, and in the long run, you will be able to build up a pretty nice profit. Even though it might not seem like much at first. Following that principle, J.L Kelly launched another parameter within his system, namely, stake leverage in relation to over-odds. The greater the positive equity (or expectation), the higher the percentage you can risk.

Put in other words: The greater the over-odds, the greater the percentage of your bankroll can be risked.

Kelly’s formulas regarding up and down adjustment of the stake percentage are heavy to work with for the individual esports bettor. Fortunately enough you do not have to stick strictly to the “principally optimal” percentage every time, but just keep the basic principle in mind. It is important that in your own practical betting you should strongly consider adjusting for risk.

There can be great value in an odds of for example 100 (99/1) if the chance of it winning is three percent instead of one. But after all, there is still a high risk of having to wave goodbye to the stake. That does not mean you should not place a stake on this kind of odds – not at all – but that you should keep down your effort to a reasonable level.

The Kelly system is most easily implemented when it comes to fifty-fifty bets, as it is typically found in the ‘money line’ market, but nothing prevents you from converting it to other types of bets such as 1X2. Just adjust for risk!

How to use the Kelly betting system

Do you feel haunted by misfortune? Are you good at predicting games and maybe even finding value bets but still have red numbers on the bottom line? In that case, it is probably your money management that has failed.

• Do you have a betting strategy?
• What are your aims and ambitions with betting?
• How much are you looking to win?
• And how are you going to win it?

In any case, instead of setting fixed targets – “in a month, I must have won this much” and the likes – let the bankroll and the success (or failure) dictate the size of your stakes.

Most experienced esports bettors who lose do not lose because they know nothing about betting. They lose because they know nothing about money management and/or they lack a betting strategy. The lack of a betting strategy and/or the lack of knowledge about value bets is making the bookmaker industry millions every year. This article will try to counteract that.

Why the Kelly System actually works

Above, I wrote about what I think is the best money management system. The Kelly system, in its pure form, is not very manageable and certain adjustments are sensible, but as for the basic principles, there is no doubt that the American professor was definitely onto something. I also recommend if you want to take full advantage of this article, to read my piece about the common money management mistakes.

The Kelly system aims to adjust your stakes according to your available bankroll. Depending on the risk (of losing your bankroll) you are willing to take, you can basically choose to bet perhaps either one or two percent of your bankroll per bet. This as a starting point for a minimum bet.

I promised insight into how I and other serious esports bettors handle the Kelly system in a day-to-day betting setting and here is how.

Adjust once a month

Basically, I do not continuously adjust my stake size from bet to bet, as the system in its pure form otherwise prescribes that I should. I make the adjustments once a month, a procedure that works for me and is less time-consuming. I have made it a regular procedure once a month to make betting status, study my accounts and possibly adjust stake sizes. I maintain the base percentage that the Kelly system prescribes and after a month of play if there has been a profit, I up the percentage. If there has been a deficit in the past 30 days, I lower the percentage.

I personally do not practice “flat betting” (although I would like to emphasize that there is nothing wrong with the flat betting method) but leverage my stakes according to how good I think the bet is. That is how big an over-odds it is. I seek to differentiate according to how much value I find in the bet.

Calculation of value

I have to point out here that in the following section you should be aware that “value” references are made on the basis of just one of two recognized methods of calculating value or over-odds. This method is based on the value of “over the stake” or “over 1,00” and it is the method I feel is most suitable for the esports bettor in search of value bets. The other recognized method aims to find the over-odds from the “zero starting point”. The method used in this article is aimed at the surplus-value after the stake has been deducted (if you find that the other method fits you better, the value sizes must be adjusted downwards in the following section).

The value categories

I operate with my betting in three different value categories, which we can call “marginal value”; “clear value” and “huge value”. I could wish for a little more finds in the latter category, but this is not the reality, and if I have to put numbers on the distribution of bets within each of the three categories, 70-80 percent of the bets are “marginal value”, 20-30 percent are “clear value” and unfortunately less than five percent are “huge value”. As an esports bettor, you quickly find your own personal level, and it is important to keep in mind the basic principle that bets with minus value must never be played. If you keep that in mind, it cannot go completely wrong. To ensure that your rating is always on the right side, you should (at least if you are not a particularly seasoned esports bettor) strive not to bet with less than 5 or maybe even 10 percent added value. The more experienced you become, the bettor you can utilize your found marginal value.

Example of the Kelly system

Bets with a maximum of 20 percent surplus value can be categorized as “marginal value”, bets in the range of 20 to 50 percent surplus value as “clear value” and bets with more than 50 percent surplus value as “huge value”.

I combine these three categories with how big the risk is. Since my starting point for a bet is one percent of the bankroll, the combination with risk is as follows: If the risk is below one third (less than a fair odds of 1,50), I call it “low risk” and multiply the stake with w

According to Oxford, a fair odds is “the odds which would leave anybody betting on a random event with 0 expected gain or loss. Thus, if the probability of the occurrence of a random event is p then the fair odds are (1 − p) to p. If, for example, p = 1/3, then the fair odds are (1 − 1/3) to 1/3 or 2 to 1. Conversely, if the fair odds for a random event are a to b, then the probability of winning is b/(a + b)”.

Written by KennyPowers

KennyPowers is a man of many talents, like being a Danish freestyle rapper with a bachelor's degree in Language and International Studies, English (LISE) from Aalborg University. Currently residing in Malta working as a SEO Executive for a big bookmaker, he offers a lot of insight into the gambling industry. He is also very well informed about the newest developments in FIFA and CS:GO.