Re: How much would you pay?
- From: Stanley Devia <stan.devia@xxxxxxxxx>
- Date: Tue, 26 Aug 2008 19:54:15 +0930
Paul Rubin wrote:
Yves wrote:Q: You are given two dice. One is "loaded" so that '6' appears 50% of
the time, and the other numbers (1,2,3,4,5) appear 50% of the time
with equal probability. I will pay $1 for every point you roll (e.g.
if you roll a 2 and 3, I will pay you $5). What would you pay for the
right to roll the set of dice? Explain your answer.
Ans.: I would pay no more than $2...which is the minimum amount I
could win for playing. Of course you are probably looking for the
highest amount that someone would pay based on the probability of a
"safe" risk. To that I would say, uh, I don't know. Could someone
help?
A Bayesian would say that paying anything up to $8 (the expected payoff) would be worthwhile. Someone versed in utility theory would assess the utility function of the player -- risk averse players would only be willing to play at some price below $8, risk seeking players would be willing to go above $8, the specific threshold depending on the degree of risk aversion or (I never know what to call the opposite of risk aversion -- "risk propensity"? "risk tolerance"? "thrill seeking"?).
/Paul
I think 8 is the expected value of 1 fair and 1 loaded dice described above. The expected payout of a $1 bet I make out to be -$3.00.
.
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- From: Paul Rubin
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