The Kelly Criterion
Edward Thorp, in his famous Beat the Dealer, first applied this mathematical principle to the game of blackjack, although it applies to all wagering situations. Professor J. L. Kelly originally suggested it and proved it mathematically in 1956, and it has been substantiated in practice by computer runs. Basically, the theory is this:
The optimal betting method is to bet a percentage of your total bankroll that corresponds exactly to the percent advantage you have at any particular time.
Known as the “Kelly Criterion,” this betting guide seems rather obvious to us today, but it was not always so. Gamblers did not realize that there was a precise relationship between the amount they should bet, their advantage, and their available bankroll. Thanks to the Kelly Criterion, the correct-sized wager can be determined as long as one knows the advantage one enjoys.
