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Zero or Two Thousand?
6 minute read
Published:
Would you pay $1000 for an unbiased coin toss that gives you $2000 if heads and nothing if tails? Tomorrow you can have zero or $2000 in your pocket, each with a 50% probability. Surely you don’t feel neutral about it. You would either take it or not. But mathematically, you should be neutral about it. Since the fair value of a bet is given by the linear combination of the two states (mathematical expectation), which in this case is just (50% * $0) + (50% * $2000) = 1000. So where is the discrepancy?