Personal Risk Appetite
It’s worth noting that even with a precise estimate of true winning percentage, using a Full Kelly bankroll management system might be too aggressive for your personal preferences. That’s fine – your bankroll management system should be tailored to your desired to risk-return profile, and everything at or below a Full Kelly strategy is a valid bankroll management strategy.
Let’s say that you’re risk averse, and your objective is to minimize the chances of losing 20% of your bankroll. You decide that you don’t want greater than a 5% chance of losing 20%, so you can choose a 0.25x Kelly Fraction as your desired bankroll management strategy.
The above calculations assume that all bets are independent of one another and that no bets are occurring simultaneously. If you have simultaneously occurring wagers, such as betting on the Lakers and the Patriots at the same time, you should consider betting a little less than the Kelly Criterion suggests.
Example: Consider a situation in which you have 20 bets that you want to bet 5% of your bankroll on. If you bet them all simultaneously and lose all 20 bets (hey, it can happen!), you’ve lost your entire bankroll. If those wagers had happened sequentially, the Kelly Criterion would have told you to bet less money after each loss and you still would have 36% of your bankroll remaining.
The calculations are little trickier and beyond the scope of this article. For further reading, you can check out “Algorithms for optimal allocation of bets on many simultaneous events” by Chris Whitrow. (Reader beware, unless you have a good handle on multivariable calculus, the paper may seem like a foreign language.)
What If I Don’t Know My Winning Percentage?
This Kelly Criterion discussion builds the framework around the upper bound of your bet sizing with a known winning percentage. If you don’t have a reasonable estimate of your winning percentage on a particular bet, I urge you to be very conservative with your bet size. Until you are confident in your estimated win percentage of a bet, I would suggest limiting your bet size to 0.5% to 1.0% of your bankroll.