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[Warning: Spoiler] > Of course, you can't offer the guy infinity dollars. So the interviewee is forced to either settle on a real world number—as much as the p

[Warning: Spoiler] > Of course, you can't offer the guy infinity dollars. So the interviewee is forced to either settle on a real world number—as much as the player can afford—or delve into marginal utility theory I don't think that as much as the player can afford is a real world answer, unless it means as much as the player can afford to lose. There is a 50% chance he'll walk away with $1. As Wall Street have proven, it's not about maximizing expected returns, it's about optimizing returns within bounds of acceptable risk.

ardit33 18y ago
I agree with you. Unless I misunderstood the question; the theoretical "right" answer is just wrong. Let's make it more practical. There is 100k in the table. A guy tells you, head you double the money, tail, you stop, and get what is there, but you have to pay a fee. Obviously, up to 100k for the fee, it is no brainer, head you end up with at least 200k, tail, you go home with 100k, same as the fee you paid. BUT: are you willing to pay 120k? 150k? Mathematically, you should, as the probablity of winning is a lot larger, but realistically you have 50% chance that you might loose 50k right away. Assuming that all your savings are 100k, would you have the stomach to a accept this risk? Most normal people, probably not. But according to this lawfirm, you should. Maybe this thinking got us in trouble in the first place.
- tokenadult 18y ago
  according to this lawfirm hedge fund
aristus 18y ago
It bugged me too, but hey, that's journalism. My gut said 3 bucks. That's about as much as I would want to lose on a Martingale bet.
- trjordan 18y ago
  But you're playing the house to his Martingale bet, right? If the game was repeated, you should be willing to bet all your money on it, since the odds are in your favor. I think the question checks your ability to understand the mathematical potential payoff, but also to weigh that against the real-world consideration of risk.
  - aristus 18y ago
    I suppose. But there's a difference between "mathematical potential payoff" and how much I will risk on the flip of a coin. And as far as I can tell, the amount I pay has no effect on the odds or rules. So, three bucks.
    - trjordan 18y ago
      Oh, absolutely, and that's the point of the question. My guess is that the answer "three bucks" and the answer "Well, the expected payoff is infinite, but ... three bucks" is the difference between the door and an offer.
notaddicted 18y ago
Risk is factored in to expected return. Based on running this code a half dozen times, I'd pay up to $8 to play. http://codepad.org/z4LALzhr http://codepad.org/z4LALzhr EDIT: Although I am aware that mathematically, the potential upside is infinite.

ardit33 18y ago

I agree with you. Unless I misunderstood the question; the theoretical "right" answer is just wrong. Let's make it more practical. There is 100k in the table. A guy tells you, head you double the money, tail, you stop, and get what is there, but you have to pay a fee. Obviously, up to 100k for the fee, it is no brainer, head you end up with at least 200k, tail, you go home with 100k, same as the fee you paid. BUT: are you willing to pay 120k? 150k? Mathematically, you should, as the probablity of winning is a lot larger, but realistically you have 50% chance that you might loose 50k right away. Assuming that all your savings are 100k, would you have the stomach to a accept this risk? Most normal people, probably not. But according to this lawfirm, you should. Maybe this thinking got us in trouble in the first place.

tokenadult 18y ago
according to this lawfirm hedge fund

aristus 18y ago

It bugged me too, but hey, that's journalism. My gut said 3 bucks. That's about as much as I would want to lose on a Martingale bet.

trjordan 18y ago
But you're playing the house to his Martingale bet, right? If the game was repeated, you should be willing to bet all your money on it, since the odds are in your favor. I think the question checks your ability to understand the mathematical potential payoff, but also to weigh that against the real-world consideration of risk.
- aristus 18y ago
  I suppose. But there's a difference between "mathematical potential payoff" and how much I will risk on the flip of a coin. And as far as I can tell, the amount I pay has no effect on the odds or rules. So, three bucks.
  - trjordan 18y ago
    Oh, absolutely, and that's the point of the question. My guess is that the answer "three bucks" and the answer "Well, the expected payoff is infinite, but ... three bucks" is the difference between the door and an offer.

notaddicted 18y ago

Risk is factored in to expected return. Based on running this code a half dozen times, I'd pay up to $8 to play. http://codepad.org/z4LALzhr http://codepad.org/z4LALzhr EDIT: Although I am aware that mathematically, the potential upside is infinite.