The Kelly Criterion is by far the most sophisticated and complex betting system which can be used in blackjack and other gambling games. It is based upon concepts of probability theory. The mathematics of the Kelly Criterion can be somewhat difficult to master, but the system has consistently outperformed other methods of betting since it was introduced.
The system is named after its creator, J.L Kelly, Jr., who first made the Kelly Criterion available in a paper he published in 1956. In his paper Kelly clearly states that the Kelly Criterion is designed to work when a game is played many times over. In blackjack, this means that one should evaluate the success of the Kelly Criterion over many hours and hands of blackjack play. One two-hour session at the blackjack table may not produce a profit with this system. Therefore, it is a system which is more useful for the professional blackjack player who plays the game full time.
This method of betting has been so popular and powerful that in recent years some have claimed to have employed it in the stock market. Among these individuals are Warren Buffet and Bill Gross.
As we stated above, the Kelly Criterion is highly mathematical. It is very different from the other progression betting systems you will find for use in blackjack. In fact, the Kelly Criterion isn’t really a progression betting system at all. The formula is used to determine the appropriate bet size in a given game of blackjack, and the percentage of one’s bankroll which should be risked on any one bet.
Obviously, the Kelly Criterion is worthless to blackjack players who do not know how to count cards or do not understand basic blackjack strategy. These things must be mastered first before the player attempts to use the betting system in live blackjack play. A core principle of the Kelly Criterion is that the player must have an edge over the house before making a bet. If the player has no edge, or the house holds an edge, a bet cannot be made with this system. The only way a player can ever gain an edge over the casino in blackjack is through the use of basic strategy and card counting.
A very detailed set of formulas are what govern the Kelly Criterion, and these are much too detailed for our short examination here, but there are some basic elements which deserve our attention. For one, each bet in the Kelly Criterion is considered independently. This is one of the main differences between the Kelly Criterion and a progression betting system. In a progression, your next bet is determined by whether you won or lost the current hand. In the Kelly Criterion, your current bet is all that matters. What you do on the next hand will be determined independently of whether you won or lost the current one.
The goal of the Kelly Criterion is the long-term growth of the bankroll. In this regard, the Kelly Criterion is very much like an investment strategy. The blackjack player is forced to regard the game as a series of investments which give overall growth to their playing capital, or bankroll. Below is a very basic explanation of how the Kelly Criterion works in blackjack play.
First, the player will need to determine the edge held over the house. It has been stated that card counting and proper basic strategy can give the player an overall edge of 1.5 % over the house in certain situations. Obviously, this number increases when the deck is very favorable to the player. Therefore, it is necessary for the blackjack player using the Kelly Criterion to not only count cards but maintain an accurate estimation of their edge over the house. Unless you are very good at mathematical calculations, this is a very difficult proposition.
Next, using the Kelly Criterion formulas, the player bets a specific percentage of their entire wagering bankroll depending on how big their edge is. An example would be that a 1% edge would equal betting 20% of the bankroll. So, if your bankroll was $500 you would bet $100 in this scenario. This is just an example, and by no means reveals the true complexity of the Kelly Criterion system. As you can see, because each hand is considered to be an individual investment, attempting to use the Kelly Criterion without a full understanding of the formulas can be a disaster.
Edward O. Thorp, in his landmark book Beat The Dealer, discusses many applications of the Kelly Criterion in blackjack. It is highly recommended that a player who wishes to use this betting system study this book, or one similar, for a thorough understanding of the principles. It is much better that beginners stick with a simpler system, but serious professionals will find the Kelly Criterion to be more accurate than anything else they have tried.