For the sake of demonstrating how the Kelly Criterion works, we can assume that you are able to assess the probability of a particular bet being successful with a reasonable degree of accuracy. With this information, we can then use the Kelly Criterion to calculate the stake, by working out the following simple formula:
(bp – q) / b = f
In this equation, ‘b’ refers to the multiple of the available odds on the bet in question. For example, if the decimal odds for a bet are 4.0, then ‘b’ is 3. The letters ‘p’ and ‘q’ refer to the probability of the bet winning and losing respectively. So if a bet has a 55% chance of being successful, then p will be 0.55 and q will be 0.45. Finally, ‘f’ is the answer to the equation and refers to the fraction of your total betting bank that you should use in this bet.
If we take an example of a bet where the decimal odds are 4.0 and the probability of the bet winning are 35%, we can apply the relevant figures to the equation as follows:
((3*0.35)-0.65) / 2 = 0.4
Based on the Kelly Criterion, for this bet, although the probability of losing is higher than the probability of winning, you should be staking 40% of your betting bank.