Quant Memo
Probability/●●●●

Two envelopes with a real prior

Asked at Jane Street

Two envelopes hold amounts in a ratio of 22 to 11, but now the amounts are drawn from a known distribution: the smaller amount AA is equally likely to be \10oror$20(eachwithprobability(each with probability\tfrac12),givingenvelopepairs), giving envelope pairs {10, 20}oror{20, 40}.Youpickanenvelopeatrandomandopenittofind. You pick an envelope at random and open it to find X$ dollars.

For each amount XX you might see, should you switch? What is the overall expected gain from a policy of always switching?

Show a hint

List every value XX you could observe: 10,20,4010, 20, 40. 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.

More Probability questions