What is Kelly Criterion?
A formula for sizing a bet or position to maximize long-run growth given your edge and the odds — bet more with a bigger edge, never enough to risk ruin.
Educational — not investment advice
The Kelly criterion answers "how much should I put on this?" It scales your stake to your estimated edge: a larger, more certain edge justifies a larger position, a thin edge a small one. Followed exactly, it maximizes the long-run compound growth rate of your capital.
Its deepest lesson is defensive — Kelly never tells you to bet an amount that could wipe you out, because ruin ends the game and you can’t compound from zero.
The trap most people miss
Full Kelly is brutally volatile and assumes you know your edge precisely, which you never do. Overestimate your edge and full Kelly over-bets you into deep drawdowns — which is why seasoned users bet a fraction ("half-Kelly" or less).
Frequently asked about Kelly Criterion
Should I use full Kelly?
Rarely. Full Kelly is extremely volatile and assumes a known edge. Most practitioners use half-Kelly or less to cut the swings and the risk of over-betting a mis-estimated edge.
What does Kelly protect against?
Ruin. Its core discipline is never staking an amount that could take you out of the game, because you can’t compound from zero.
Related terms
Guides that use Kelly Criterion
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This definition is for educational purposes only and is not investment, tax, or financial advice. Concepts are explained in general terms; how they apply to your situation can differ. Always do your own research.