Kelly in plain words, and why we use units instead

Kelly is a formula that answers one question: how much of my bankroll should I bet when I have an edge?

In plain words: bet more when your edge is bigger and the payout is better. Bet nothing when there is no edge.

The formula is your edge divided by what the bet pays.

Example only: you believe a bet wins 55% of the time at -110.

• It pays 0.91 for every 1 risked.
• Edge per unit risked: (0.55 x 0.91) - 0.45 = about 0.05.
• Kelly size: 0.05 / 0.91 = about 5.5% of bankroll.

The catch is the word "believe." Nobody knows the true 55%.

• If the real number is 53%, Kelly says about 1.3%. You bet four times too much.
• If the real number is 52.4%, the right bet is zero.

Overbetting an edge you don't have is how bankrolls disappear. That is why many people who use Kelly bet a fraction of it.

What we do instead: fixed units. 1u is 1% of bankroll. Most plays are 0.5u to 1.5u, and the largest bet we allow is 5u, which is rare. The idea is the same as Kelly, more on stronger plays, without pretending to know our edge to the decimal.

What cuts against it: units are cruder than Kelly. We accept that in exchange for not betting on a guess.

Education only, not a guarantee. Bet only what you can afford to lose. 1-800-GAMBLER.