The Only Optimal Bet Sizing Formula
The Kelly Criterion, developed by John Kelly at Bell Labs in 1956, tells you exactly how much to bet when you have an edge.
The Formula
Kelly % = (bp - q) / b
Where: b = odds, p = win probability, q = loss probability (1 - p)
Why This Matters
Every decision with uncertain outcomes is fundamentally a bet. Kelly tells you how aggressively to pursue opportunities.
The investment masters who use Kelly include Ed Thorp, Bill Gross, and Warren Buffett.
Example
60% chance of 2x return: Kelly % = (2 x 0.6 - 0.4) / 2 = 40%
Half-Kelly Principle
Most sophisticated investors use "half Kelly" because:
- Probability estimates are uncertain
- Kelly assumes infinite bets (you cannot)
- Loss pain exceeds gain joy
- Full Kelly volatility is stomach-churning
Key Insights
- Never bet more than Kelly: Over-betting guarantees ruin
- Zero edge = zero bet: No edge means do not play
- Edge estimation is crucial: Formula is only as good as inputs
Learn at KeepRule. Practice with scenarios.
Size your bets optimally. KeepRule
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