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September 2

Coin flip

This has to be a really dumb question but it seems slightly paradoxical. Say you are going to bet $1 on a coin flip. One way to look at this is you plunk down your $1, the coin is flipped, and if heads you get back $2 (your original bet plus $1 winnings), net result +1. If tails, you lose your $1, net result -1. So the expected value is 0.5(+1) + 0.5(-1) which is 0, not surprising.

Another way to see the same proposition is you start with nothing and the coin is flipped. If heads, you receive $2. If tails, you receive $(-1) (i.e. you now have to pay $1). So the expectation is 0.5*2 + 0.5*(-1)= 0.5.

What has happened? It's the same proposition both ways, I think. Is there a systematic way to tell which analysis is the right one? The second calculation has to be wrong, but it's not obvious how. Thanks. 2601:644:8581:75B0:0:0:0:C030 (talk) 22:12, 2 September 2024 (UTC)[reply]

The first way, you gain net $1 for a win; the second way, you gain $2. (The dollar in escrow does not change that.) They are not the same bet. —Tamfang (talk) 23:37, 2 September 2024 (UTC)[reply]

The calculations by themselves are both correct, but (as noted by Tamfang), they represent different betting propositions. Assume the coin comes up tails. In the first version your loss is the $1 paid in advance, in the second you pay $1 afterwards for losing the bet. So that amounts to the same loss. But now assume the coin comes up heads. In the first you pay $1 in advance and then receive $2. In the second version you just receive $2 without having to make an advance payment. That is clearly more advantageous. To make your second version equivalent to the first, replace "you receive $2" by "you receive $1". --Lambiam 06:00, 3 September 2024 (UTC)[reply]

To supplement to the arithmetical explanations above: It's not a paradox, and since you know which answer is right, you know the basic analysis is to step through it slowly and carefully. This may not be possible in a real-world cash transaction, and this is how quick change scams work (and similar for some street gambling scams) -- in other words, it's not a dumb question, it's not obvious, and if you can think of a truly easy generalized way to work this stuff out for people in real-time social situations, you'll have done a huge service for humanity. (See video examples of the quick change scam from Noah Da Boa and The Real Hustle.) (Right now, most people online say just not to give change to strangers -- the best way to win is not to play.) SamuelRiv (talk) 18:23, 3 September 2024 (UTC)[reply]

Incidentally, one way to see that they are different is to determine the (maximum) amount you would be willing to pay to be in the second position instead of the first. (I get $0.50) Tito Omburo (talk) 20:10, 3 September 2024 (UTC)[reply]

Thanks everyone, I must not have been thinking clearly. Another way to see it is imagine playing twice, winning one and losing one. You end up with $1 instead of with $0. 2601:644:8581:75B0:0:0:0:C030 (talk) 22:34, 3 September 2024 (UTC)[reply]