Two envelopes with a real prior
Asked at Jane Street
Two envelopes hold amounts in a ratio of to , but now the amounts are drawn from a known distribution: the smaller amount is equally likely to be \10$20\tfrac12{10, 20}{20, 40}X$ dollars.
For each amount you might see, should you switch? What is the overall expected gain from a policy of always switching?
Show a hint
List every value you could observe: . For each, use the prior to figure out whether the other envelope is bigger or smaller, and by how much.
Your answer
This one is open-ended. Work it through, then check your reasoning against the full solution.