Your friend Donald owes you $10 but does not currently have the money to pay you back. He does, however, want to clear the debt with a wager. He wants to flip a coin for double or nothing. If the coin lands heads, he will pay you $20. If the coin lands tails, he will pay you nothing. As the coin is in midair, what is your expected value of this wager?

Question

Quizplus · Accepted Answer

The expected value of this wager can be calculated by taking the sum of the probability of each possible outcome multiplied by its payoff. In this case, the probability of the coin landing heads or tails is each 0.5. So the expected value is:

(0.5)(-$10) + (0.5)($20) = $0

This means that on average, you will neither lose nor gain money by accepting Donald's wager. Therefore, it is up to the individual's risk tolerance to decide whether or not to take the bet. In terms of clearing the debt, you should accept this wager as there is no downside and the potential reward is $10.

Your Friend Donald Owes You $10 but Does Not Currently