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 (so the pair is ) with probability
You open your envelope and see .
Show that switching has positive expected gain for every value you could observe. Then explain why this does not actually let you "switch forever" for a contradiction.
Show a hint
Given (for ), your envelope is either the smaller of the pair or the larger of the pair . 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.