What Is the Kelly Criterion?
Developed at Bell Labs in 1956 by John L. Kelly Jr., the Kelly Criterion answers a deceptively hard question: given an edge, how much should you stake to grow your bankroll as fast as possible without going broke? The formula — f = (bp − q) / b — balances aggression against ruin, and it underpins position sizing for card counters, sports bettors, and hedge funds alike.
The catch: Kelly assumes you know your true win probability. Overestimate it and the formula will systematically oversize your bets. That is why practitioners use fractional Kelly and conservative probability estimates.
Kelly in Practice
Example: you make an NFL underdog 50% likely to win, and a book offers +150 (implying only 40%). Kelly says stake 16.7% of bankroll — Half Kelly, 8.3%. If your estimate is right, no other staking plan compounds your bankroll faster over hundreds of bets.