Kelly criterion
Kelly sizing maximizes geometric return but creates large drawdowns. Most pros use fractional Kelly (half or quarter).
Prediction Markets 101 editorial team Updated April 16, 2026 1 min read
Definition
The Kelly criterion is the optimal position size formula for a given edge and odds, maximizing long-run wealth growth.
Plain-English explanation
Formula: f = (p*(b+1) - 1) / b, where p is your probability of winning and b is the payoff odds. For prediction markets: f = (p - q) / (1 - q) for a YES bet at price q believing the true probability is p.
Example
You think true probability is 60%, market is offering YES at 50¢. Full Kelly: (0.60 - 0.50) / (1 - 0.50) = 20% of bankroll. Quarter Kelly: 5% of bankroll.