Money Management in Theory and Practice: Part 5

I thought that I had completed this series, but I realize there are a few remaining items that should be discussed. This column will look at the question of, ‘how do you know if your money management skills need to be improved?’ and discuss the Kelly Criterion for money management.

How to Tell if Your Money Management Needs to Improve

I have discussed dividing bankroll sizes into three categories – small, medium and large. A small bankroll is an amount you could get in a month or less from working, from your business or from your investments. A medium bankroll should take about six months to accumulate. A large bankroll takes a least a year, and in some cases several years.

I have also emphasized that you should never risk losing a large bankroll! The larger your bankroll is, the more risk averse you should be. If you have lost all or most of a medium or large bankroll within the last year, you definitely have to improve your money management skills. If you have frequently accumulated small bankrolls, and lost them taking shots in big games, work on your money management. In this series, I have given you some reasonable guidelines for managing your money, but I can’t provide any definitive mathematical proof that they are the best. There is, however, one mathematically proven system for money management.

The Kelly Criterion

The Kelly Criterion strategy is used to calculate your advantage and bet that percentage of your current bankroll. For example, if you win three out five times, you win 60 perent of the time and lose 40 percent. Your advantage is the difference or 20 percent. Therefore, it suggests your optimal strategy is to bet 20 percent of your bankroll each time.

Let’s try a short test and compare betting 20 percent to a move conservative strategy of betting 10 percent and a riskier strategy of betting 30 percent. There is also a column that shows the result of severe over betting. Over five trials, you will win three and lose two. The order of wins and losses doesn’t matter, but to make it easy, assume you lose your first two bets and then win your last three. You start with 100 and this table shows where you are after each trial.

10% 20% 30% 50%
Loss 90.00 80.00 70.00 50.00
Loss 81.00 64.00 49.00 25.00
Win 89.10 76.80 63.70 37.50
Win 98.01 92.16 82.81 56.25
Win 107.80 110.59 107.65 84.38

Note that betting your advantage is the most successful strategy. You should also note that under betting will cause your bankroll to grow more slowly than betting the optimal amount. Over betting, even with a huge advantage can put you in jeopardy of losing. In fact, extreme over betting will result in eventually losing everything. It is easy to see that if you bet 100 percent of your bankroll, you go broke with your first loss.

Kelly works well for sports betting or blackjack card counting, assuming you have an edge and can calculate it. Unfortunately, there is no practical way to apply this to poker. In cash games, you don’t always win or lose exactly the amount of your whole buy in. Some games are tougher than others, so advantage will always be changing. In fact, as your bankroll increases, and you start to play in games with higher buy ins, you will face tougher opponents and your edge will decline.

Likewise, if you are losing, you will play in games with smaller buy ins, and your edge should increase. I won’t go into all the problems involved with trying to apply Kelly to tournaments where the number of entrants, prize pool, and the chance of winning each particular prize (first through min-cash) is impossible to calculate accurately. Also, most players are egotistical, and think their advantage is bigger than it is. Therefore, I’d advise you to use my simple approximations of the percentage of your bankroll to risk, based on your tolerance for risk:

Plunger Normal Plodder
Small 20% 15% 8%
Medium 10% 8% 4%
Large 5% 3% 2%

Let me emphasize that these percentages are the maximum you should risk. If you lose the maximum in any game or tournament, recalculate your current bankroll before you make your next wager. ♠

Steve ‘Zee’ Zolotow, aka The Bald Eagle, is a successful gamesplayer. He has been a full-time gambler for over 35 years. With two WSOP bracelets and few million in tournament cashes, he is easing into retirement. He currently devotes most of his time to poker. He can be found at some major tournaments and playing in cash games in Vegas. When escaping from poker, he hangs out in his bars on Avenue A in New York City -The Library near Houston and Doc Holliday’s on 9th St. are his favorites.