Money Management

"Money management is one of the hardest disciplines. Smart punters, like smart jockeys, pace themselves".

 

Money Management is a crucial skill that punters that wish to win in the long term need to grasp. It’s one thing to place bets when well informed, it’s another thing to determine how much to bet in order to make a significant profit whilst not breaking the bank. There are many different methods of money management in betting and I will describe them below as well as their advantages and disadvantages.

 

1. Martingdale System

 

Better known as the “double or nothing” system, this method will see the punter double their bet after a losing bet in order to eliminate any losses previously encountered. Punters using this method are doomed for failure. The Martingdale method has no mathematical backing and whilst you will have long successful runs, all it takes is one bad run and you’ve lost everything that you had. It doesn’t matter how good advice you may be getting, you will always loose with the “double or nothing” system.

 

2. Percentage of your bank

 

Linked to the Kelly Criteria (see method 5), many punters like to use a percentage of their bank in order to determine how much to bet. Mathematically it is impossible to go bust (lose all your bank) with this method, but it is realistically possible. One of the down sides to this method can be seen using the following example. If one was to bet on 2 games at odds of $2.00 and they bet 20% of their bank (say $1,000) on each. If both games win then they will win $440, if they lose they will lose $360 and if they win one and lose one they will lose $40. Hence this means that using this method if they win as much as they lose they will come out behind. Hence this method has been known to do well if the person is constantly backing favourites. If you like to bet the underdog a lot then stay well clear of this method as you will not win in the long term.

 

3. Fixed Amount Betting

 

The most simple and commonly used method is just fixed amounts, simply betting $100 on each bet. Fixed Betting has a mathematical chance of going bust but keeping the fixed amount to a small percentage of your overall bank will hopefully fix this. However there are many downsides to fixed betting. Firstly according to fixed amount betting you are required to bet the same amount on a 100:1 shot as you are a 2/5 favourite. Similarly if your bank doubles or even triples you will find yourself still betting the same small amount that you might have been doing 10 years ago. Fixed amount betting is generally used by people who do not understand the mathematical principles of gambling and whilst the method is successful, there are many other methods out there that outweigh it.

 

4. Inverse Odds Betting

 

Inverse odds betting is quite a successful method of betting in that it is similar to Fixed Amount Betting however it takes into consideration the odds. For example, one might always like to win $500 with each bet. So for that 100:1 shot they will bet $5, and for that 2/5 ($1.40) favourite they will bet 500 / (1.40 – 1) = $1,250. However the example just given highlights this problem, for a $1.10 favourite they should bet $5,000 and for a $1.05 favourite they should bet $10,000. The Inverse Odds Betting method does not take into consideration your bank balance size, and all it takes is one of these favourite bets not to come through and you’ve lost your bank. Certain limitations can be used to stop betting so wildly like adding that you only bet, say, 10% of your bank, but this will mean that you’re not getting the $500 that you so wished for at the start.

 

5. Kelly Criteria

 

The final and mathematically proven best method is the Kelly Criteria. Made in 1956, originally for information rates, the Kelly criteria has been adapted to sports betting in a large way. The original formulas have also been simplified. The Kelly criteria has been mathematically proven to make the most amount of money but also has a large risk. The advantages is that it takes not only into consideration the probability of the player/team to win, but also the overlay (advantage) that you have. Hence it sees you as betting more on favourites and less on underdogs (like the Inverse Odds Betting), and it sees you bet more when you have a greater advantage over the bookmakers and less when you don’t have as large an advantage. The downside is that one has to calculate the probability of an event happening. However the good news is that at www.sportpunter.com we do that for you!

 

Firstly let’s explain what an overlay is. An overlay is the percentage advantage that one has over the bookmaker. For example if one was to have a 10% overlay, this is would mean that their Return on Investment (ROI) or %profit on turnover should equal 10%. The overlay is calculated by the following formula:

 

Overlay = (probability * bookies price) – 1

 

Bets should be made only on positive overlays.

 

There have been many branches of the Kelly Criteria in recent times, but to start off with we will look at the original Kelly Criteria which of recent has been called “full Kelly”

 

 

5a. Full Kelly

 

Bet Amount = Overlay / (bookies price – 1)

 

The Fully Kelly method is rarely used by punters despite being mathematically proven to be the most successful. The reason is because it will take you on a rollercoaster ride. At times the Full Kelly method will suggest to bet more than 50% of your bank balance, which is quite unrealistic. The Full Kelly Method is extremely risky and one using it will see large bank balances chopped down to 1/10 of what it used to be on occasions. However when winning it will also see bank balances skyrocket (only to be chopped down later on). Because of it’s rollercoaster nature, many people have scorned the Kelly criteria and have been persuaded not to use it. However that doesn’t mean that the Kelly method is useless; many people have adopted the half Kelly or quarter Kelly methods to great success.

 

5b. Factional Kelly.

 

The Fractional Kelly is simply to bet a certain fraction of what the full Kelly suggests. Half Kelly and quarter Kelly are two commonly used methods where one simply bets half or a quarter of what the full Kelly system suggests. What this results in is a much smoother ride in that winnings won’t be as great, but losses will be hardly as damaging. Many people often make the error by thinking that half Kelly will always result in your bank being half as much as if one was using full Kelly. This is not so, and quite often it can be shown that half Kelly (and quarter Kelly) will outperform the full Kelly method. The fractional Kelly is great when you average approximately the same amounts of winners as losers, whilst the full Kelly is disastrous in this situation. Determining what fraction is right for you is up to the individual. Half Kelly will see you betting as much as 30% of you bank on certain games whilst Quarter Kelly up to 15%.

 

 

5c. Constant Kelly.

 

The newly adapted constant Kelly is often preferred by many. The only difference between constant Kelly and the Kelly criteria is that constant Kelly will suggest to bet a certain percentage of a fixed amount, whilst the Kelly criteria suggests a certain percentage of a variable amount (bank balance). For example say you have an initial bank of $1,000, then the constant Kelly will suggest you to bet a certain percentage (according to the full or fractional Kelly) of the $1,000 rather than your bank.

 

E.g.. Suppose you have two games with probability of 0.6 and odds of $2.00

 

Full Constant Kelly:

Bet amount = overlay / (odds – 1)

= (2 * 0.6 – 1) / (2 – 1)

=  20%

 

So therefore one bets 20% of $1,000 = $200

 

Half Constant Kelly would bet 10% of $1,000 = $100.

The major difference between constant Kelly and non-constant Kelly is that no matter if you won or lost your last bet, you would bet the same amount on the second game as you did on the first. According to the normal Kelly criteria you would be more on the second game if you had won on the first (because bank has increased) or you would bet less on the second game if you had lost on the first (as bank had decreased).

 

One of the downsides to constant Kelly betting is the greater chance of breaking the bank, however it does eliminate the problem of losing money when you win half your bets. It is better than fixed amount betting and inverse odds betting as not only does it take into consideration the probability of winning but also the overlay.

In conclusion I would suggest either fractional Kelly method or the constant fractional Kelly method.

 

 

Multiple Kelly Betting

 

On of the big problems that punters will find especially in tennis betting is that sometimes the method that they use will tell them to spend more than 100% of their bank. Obviously this cannot happen, so what does one do? Lets look at a typical example to show some alternatives.

 

Game No.	Probability	Odds1	Overlay	Bet%
1	0.7	$2.00	40%	40%
2	0.4	$3.25	30%	13.3%
3	0.8	$1.95	56%	58.9%
Total				112.3%

 

In the above example we have to bet 112.3% of our bank which of course is not possible. Whilst Kelly came up with a multiple Kelly method for betting on more than one outcome within the same event, nothing has been done with multiple Kelly betting in independent events.

 

1. Method 1

 

Standardise the bets so that it falls down to 100%.

E.g.. Game no 1 bet 40% / 112.3% = 35.6%

 

There is of course a huge downside to this. If all three bets lose then you’ve gone bust. The probability of this happening is (1 – 0.7) * (1 – 0.4) * (1 – 0.8) = 3.6%. Therefore it is strongly recommended that this method is not used.

 

2. Method 2

 

Standardise to a certain amount, e.g. 50%.

 

3. Method 3 (multi comparison)

 

Take a look at the bets if as it was a multi bet. If the bets above were part of a multi bet, we would have a probability of 0.7 * 0.4 * 0.8 = 22.4%. The associated odds is equal to $2.00 * $3.25 * $1.95 = $12.67. We here have an overlay of

 

12.67 * .224 -1 = 184%

 

and a suggested bet of  1.84 / (12.67 – 1) = 15.77% of bank balance.

 

Hence we standardise the above bets to 15.77% of our bank balance.

 

 

There are probably many other methods around but they are just a few.

I hope that this will help you in your punting as money management is a very important part of being a profitable gambler.

Jonathan Lowe

www.sportpunter.com