Welcome to Part 8 of our series, where we delve into crucial aspects of bankroll management, bet sizing, and the psychological factors that influence betting decisions. After building a strong foundation in understanding odds, expected value (EV), and various betting models within Optimal+, it’s time to explore how disciplined financial strategies and an awareness of cognitive biases can enhance your betting success.
Here's the recap of what we've learned so far:
Bankroll management is the practice of managing your betting funds (bankroll) in a way that maximizes longevity and profit while minimizing risk. Effective bankroll management involves setting rules for how much to stake on any given wager relative to the size of your bankroll, thus ensuring that you can endure a string of losses without depleting your funds.
Most recreational bettors have no discernible bankroll management strategy. They just fire bets that are too big for their bankroll, and go bust. Then they replenish their account, fire more wrong-sized bets, and eventually go broke again.
Several strategies can be adopted depending on your betting style and risk tolerance:
Risk of Ruin (RoR) is a concept used in gambling to measure the probability that an individual's bankroll will be lost entirely based on their betting strategy and risk exposure. In the context of sports betting, it refers to the likelihood that a bettor will lose their entire betting capital due to repeated losses, potentially forcing them out of the betting arena completely.
The formula to estimate the risk of ruin is quite complex and relies heavily on statistical methods. However, a simplified version can be conceptualized as follows:
This formula assumes a 50/50 betting scenario (even odds), which simplifies the calculation but might not be entirely accurate for more complex betting strategies or varying odds. For purposes of EV betting strategy, you won’t ever need to worry about calculating RoR.
The takeaway from this formula is the following: if you make lots of bets with a negative expected value, you will eventually go broke.
In sports betting, the risk of ruin must be managed by adjusting the bet sizes according to the Kelly Criterion (which we detail later in this article) or similar bankroll management strategies. The Kelly Criterion, in particular, is designed to minimize the risk of ruin while maximizing the growth rate of the bankroll by calculating the optimal fraction of a bankroll to wager based on the bet's probability of winning and the odds offered.
Bettors often face psychological biases that can cloud judgment and lead to less optimal betting decisions:
A disciplined approach focused on EV, coupled with robust bankroll management strategies, can help mitigate these biases, leading to more rational and profitable betting decisions.
Bottom Line: If your bankroll goes to zero, you're out of the game. Have a plan, and the discipline to stick to it.
The primary goal for any bettor is to stay in the game long enough to capitalize on their edge or strategy. A high risk of ruin not only jeopardizes a bettor's ability to continue participating in betting but also increases stress and potential financial difficulties. Therefore, understanding and mitigating the risk of ruin through careful bankroll management and strategic betting is crucial for long-term success in sports betting.
By actively managing your bankroll, setting appropriate unit sizes, and making informed betting decisions, you can effectively reduce their risk of ruin and ensure that you stay in the game.
The Kelly Criterion originated from the work of John L. Kelly Jr., who was a scientist at Bell Labs. He introduced his formula in 1956 through a paper titled "A New Interpretation of Information Rate," which dealt with how information flows through cabling. As it turns out, his formula was directly applicable to managing the relationship between risk, reward and risk of ruin. This approach has since been widely adopted in various fields, including gambling, investing, and risk management.
In gambling, Kelly Criterion is used to determine the optimal size of a series of bets. It balances the trade-off between risk and reward by considering the probability of winning, the payout on winning, and the likelihood of losing.
Using Kelly, you adjust your bet size depending on your edge over the odds. This method minimizes the risk of ruin (RoR), especially over long betting horizons. If you’re in this for the long run, leveraging the Kelly Criterion formula is the optimal (pun intended) mix of risk and return.
Optimal+ automatically tailors its bet sizing recommendations using models adapted to each bet's circumstances. It incorporates the Kelly Criterion among other methodologies to suggest how many units you should risk based on the calculated EV and your bankroll.
For example, Optimal models may be set at ½ Kelly or ¼ Kelly, meaning that the result from the formula is multiplied by .5 or .25 to arrive at a scaled-down unit size.
Here’s an example of how Optimal+ presents recommended bet sizing, based on Kelly Criterion:
Based on this bet's expected value of 5.8% (your edge), Optimal tells you exactly what to wager, in this case 1.4 units.
If you're following our recommended strategy of 1 Unit = 1% of your available bankroll, this would equate to betting 1.4% of your bankroll. If your unit is $10, this would be a $14 wager.
Effective bankroll management is pivotal in sports betting. It not only safeguards against the risks associated with potential losing streaks but also enhances the chances of long-term profitability. By understanding and implementing disciplined financial strategies, recognizing and countering psychological biases, and using tools like Optimal+ for informed bet sizing, you can significantly improve your betting outcomes.
Remember, the goal is to stay in the game long enough to capitalize on your knowledge and insights, turning betting from a gamble into an investment. Bankroll management is an essential skill to develop, and prevents you from making poor decisions based on betting biases.
