Notes #19
Using Expected Values to make
WISE DECISIONS for Game Play
Fair Games & Setting Up How Much to Charge per Game
A game is considered fair, if its expected value is zero. This
means that the risk you are taking to play the game is equal to
the amount you can expect to win.
Example 1:
Suppose we play a game where you roll a regular die. If you
roll an odd number (i.e. 1, 3, or 5) you get nothing, if you roll a
2 or a 4 you get $12, if you roll a 6 you get $60. What should
be charged to make this game fair?
Set-up
1)Make a table of the possible outcomes & Cost to Play.
2) Complete the “Payoff” for each outcome and their probability of occurrence.
3) Set “ – X ” to represent the cost to play the game.
The probability is 100% (or 1) that you will lose -$X to play the game.
Outcome Payoff P(x)
(x)
1, 3, 5 $0 3/6
2, 4
$12 2/6
6 $60 1/6
Cost to Play -X 1
4) Solve for the Expected Value
5) Set E(x) to zero and solve :
6 ) FINAL ANS:
If the House charges $14 to play this game, the E(x) will be zero. The player
and the House will break even. This will make the game ___FAIR__________.
a)If the House charges More than $14, then it favors the House.
b)If the House charges Less than $14, then the game will favor the player.
Notes #20
Using E(x) to make wise
Decisions
Ex. 1: “Who Wants to be a
Millionaire?”
Let’s say you’re at the $125,000 question with no
life-lines. The question you get is the following
•Which Harry Potter character was the hero in the
story?
A. Harry Potter
B. Neville Longbottom
C. Severus Snape
D. Hermione Granger
Given Conditions
a) If you get the question right you will be at
$125,000.
b) If you get the question wrong you fall back to
$32,000.
c) Your third option is to walk away with
$64,000.
Q: What to do, what to do?
Use Expected Values to determine your answer.
Answer Options Payoff P(x)
1 correct answer $125,000 1/4
3 incorrect answers $32,000 3/4
What is our expectation “E(x)”?
E(x) = $125,000(1/4) + $32,000(3/4)
= $55,250.
$55,250 < $64,000 (walk away value).
FINAL ANSWER: Take your money and RUN!
What if we had a 50/50
Then 2 of the choices would vanish.
Now the choices left will be
A. Harry Potter
C. Severus Snape
What to do, now?
Number Payoff P(x) x P(x)
1 correct answer $125,000 1/2 $125,00 x ½
1 incorrect answers $32,000 1/2 $32,000 x ½
What is our expectation “E(x)”?
E(x) = $125,000(1/2) + $32,000(1/2) = $78,500.
$78,500 > $64,000 [walk away value].
FINAL ANSWER: Take the guess, and hope for the
FINAL ANSWER
Which Harry Potter character was the hero in the story?
The answer is C.
Severus Snape
Ex 2: Decision Theory (Investing in Stocks or Game Show)
This can be used to reason numerically which is a correct
decision to make by comparing expected values.
Example
A venture capital firm can invest in two different companies.
Company A has a 40% chance of earning a $80,000 profit and
a 60% chance of a $12,000 loss. Company B has a 70%
chance of earning a $50,000 profit and a 30% chance of a
$40,000 loss. Which is the better investment?
To do this we compute the expected amount earned from each
investment.
Company A Company B
Amt Earned P(x) Amt Earned P(x)
(x) (x)
$80,000 0.40 $50,000 0.70
-$12,000 0.60 -$40,000 0.30
E(x) =0.40 (80000)+ 0.6(-12000) E(x)=0.7(50000)+0.3(-40000)
= $24,800 = $23,000
ANS: Investing in Company A would be better it
has an expected return of $24,800 compared to
company B with an expected return of $23,000.
Ex. 3 Investing in Stocks
Expected Investment Profits
Mark intends to invest $6,000 in one of two companies. His research is
presented in the tables below:
Company ABC Company PDQ
Profit/Loss (x) Probability P(x) Profit/Loss (x) Probability P(x)
- $400 0.2 $600 0.8
$800 0.5 $1000 0.2
$1300 0.3
a. What are the expected profits (or loses) for each company?
E(x) = -400 (0.2) + 800 (0.5) + 1300 (.3) E(x) = 600 (0.8) + 1000 (0.2)
E(x) = -80 + 400 + 390 E(x) = 480 + 200
E(x) = $710 Profit E(x) = $680 Profit
Evaluating an Insurance
•
Policy
Suppose that you want to insure a laptop computer,
an iPhone, a trail bike, and your textbooks.
a) If all of your items were stolen, how much money is the insurance company
expected to pay in claims on your policy?
b) Is $100 a fair premium for this policy?
a) If all of your items were stolen, how much money is the insurance
company expected to pay in claims on your policy?
E(x) = $40 + $12 + $6 + $32
= $90
ANS: The insurance company is expected to pay out, on average, $90 for your
claim.
Evaluating an Insurance Policy
b) Is $100 a fair premium for this policy? (Premium is how much the insurance
company will charge you to cover your items.)
ANS: The $90 tells us that if the insurance company were
to write one million policies like this, it would expect to pay
1,000,000 × ($90) = $90,000,000 in claims.
They will pay out a sum of $90,000,000.
If the company is to make a profit, it must charge more than $90 as a premium, so
it seems like a $100 premium is reasonable.
Policy Price per Student: $100 Net Gains: Gross Gains – Pay outs
# of Customers: 1,000,000 = $100 mil – $90 mil
Gross Gains: $100,000,000 = $10 mil (Insurance Co. keeps)
Main Purpose of Using Expected
Values in Game Playing
Decisions
• Use Math to determine when to QUIT before it’s too
late!
Life Lessons:
#1: If the E(x) is less than what you already won, STOP
& WALK AWAY!
#2: If the E(x) is greater than what you already have/won,
then continue playing.
Get to Know Card Playing
4 Suits
For each Suit:
“9” Number Cards: 2, 3, 4, 5, 6, 7, 8, 9, 10
“3” Face Cards: Jack, Queen, King
+ “1” Ace: Per Suit
13 cards total
Example 2a (Making Money for the player or for the House)
If you spin the spinner to the right, a person has agreed to
$ 10
pay you the amount shown in the color it lands on. What is
the expected value for you to win playing this game? $5
We begin by making a table of all possible numbers that can $ 40
result along with their probabilities.
Cost to Play Payoff Net Gain/Loss P(x)
(x)
$0 $5 +$5 0.50
$0 $10 +$10 0.25
$0 $40 +$40 0.25
Expected Value = (5)(0.5) + (10)(0.25) + (40)(0.25)
= 2.5 + 2.5 + 10 = $15
This means on average a person could expect to win 15 dollars
each time they play this game, and the House loses $15.
Example 2b (Making Money for the player or for the House)
If you spin the spinner to the right, a person has agreed to
$ 10
pay you the amount shown in the color it lands on. What is
the expected value for you to win playing this game? $5
We begin by making a table of all possible numbers that can $ 40
result along with their probabilities.
If they charge you $ 20 to spin this each time what is your expected value?
Cost to Play Payoff Net Gain/Loss P(x)
[Payoff – Cost to Play]
$20 $5 $5 - $20 = -$15 0.50
$20 $10 $10 - $20 = -$10 0.25
$20 $40 $40 - $20 = $20 0.25
Expected Value = -15(0.5) + -10(0.25) + 20(0.25)
= -7.5 + -2.5 + 5 = -5
Which means on average you should expect to lose $ 5, and the
House gains $5.
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