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finance que: if there is 20% chance of getting 80% money and 80% chance of getting 50% money what outcome?

papillon2006 - 2010-01-05 00:24:14 - Personal Finance

Best Answer:

The "expected value" of 80/50 is better than 20/80, so that has the better "outcome", over time. Suppose $100 is up for grabs With 80/50, the expected value is $40 ($100 *.80 *.50) With 20/80, the expected value is $16 ($100 *.20 *.80) Sure, with the 20/80 you have a chance (1 in 5) of bringing home $80, but you have a much greater chance (4 in 5) of bringing home nothing With the 80/50, you can never bring home more than $50, but the chance of you bringing home $50 is 4 out of 5 Having said that, I think your question may be more intriguing if the options were 20/80 and 80/20 (not 50) Under this scenario, both options have the same expected value ($16). So it comes down to your aversion to risk. If you don't like risk (risk averse), you would go with the 80/20 option. If you can handle the risk, you might go with the 20/80 option However, given a long enough time frame, "cycles" of playing the game, both are equal choices.

Answers:

The outcome is that I won't be going to that casino... 1 in 5 says I lose 20% and the rest of the time I lose half! F-that!

The "expected value" of 80/50 is better than 20/80, so that has the better "outcome", over time. Suppose $100 is up for grabs With 80/50, the expected value is $40 ($100 *.80 *.50) With 20/80, the expected value is $16 ($100 *.20 *.80) Sure, with the 20/80 you have a chance (1 in 5) of bringing home $80, but you have a much greater chance (4 in 5) of bringing home nothing With the 80/50, you can never bring home more than $50, but the chance of you bringing home $50 is 4 out of 5 Having said that, I think your question may be more intriguing if the options were 20/80 and 80/20 (not 50) Under this scenario, both options have the same expected value ($16). So it comes down to your aversion to risk. If you don't like risk (risk averse), you would go with the 80/20 option. If you can handle the risk, you might go with the 20/80 option However, given a long enough time frame, "cycles" of playing the game, both are equal choices.