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The envelope distribution where switching always wins

Asked at Jane Street

The naive "always switch" argument for the two-envelope problem is usually wrong because no proper prior makes the switch gain positive at every observed value. But suppose the smaller amount is A=2nA = 2^n (so the pair is {2n,2n+1}\{2^n, 2^{n+1}\}) with probability

P(A=2n)=13(23)n,n=0,1,2,P(A = 2^n) = \tfrac13 \left(\tfrac23\right)^n, \qquad n = 0, 1, 2, \dots

You open your envelope and see X=2mX = 2^m.

Show that switching has positive expected gain for every value XX you could observe. Then explain why this does not actually let you "switch forever" for a contradiction.

Show a hint

Given X=2mX = 2^m (for m1m \ge 1), your envelope is either the smaller of the pair n=mn = m or the larger of the pair n=m1n = m-1. Use the prior weights to get the conditional probabilities, then compute the expected value of the other envelope.

Your answer

This one is open-ended. Work it through, then check your reasoning against the full solution.

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