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A game so simple that you and I must have played before!!!
Suppose a person flips a coin in front of you and she pays you $1 if a head shows up but pays you nothing otherwise. She wants to charge any potential participants an `entrance fee'. How much do you think she should charge in order to make a fair game?
Answer: I don't think anyone would give me the wrong answer! Yes, the `fair' charge is 50 cents! (Forget about utility functions, I am just talking about 1 buck!)
The reasoning behind is this: the chance of getting a head is equal to the chance of getting a tail =1/2. The average payout of her is therefore 50 cents. She needs this amount to cover her potential loss!
Birger Bergersen
1998-12-22