The Kelly Criterion Formulated by John L. Kelly and popularized by the practical success of Ed Thorp, the Kelly criterion is a formula used to determine the optimal bet size for a given set of probabilities and payoffs. Although the formula can be stated in several ways, the following expanded version appeared in Thorp’s interview in the book Hedge Fund Market Wizards: F = PW − (PL/[$W / $L]), where: F = Kelly criterion fraction of capital to bet, PW = probability of winning the bet, PL = probability of losing the bet, $W = dollars won if bet is won, and $L = dollars lost if bet is lost.8 If
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