Suppose that you are invited to join a gamble where two coin

Suppose that you are invited to join a gamble where two coins are flipped. The probabilities and payoffs of each event are described in the table below. What is the expected payoff from the gamble? Probability #Heads#Tails Payoff 2 0 $1,000 025 2 $2,000 1 1$500 0.25 0.50

Solution

Expected pay-off is the sum of probability-weighed payoff values.

Expected pay-off = $1,000 x 0.25 - $2,000 x 0.25 + $500 x 0.5

= $250 - $500 + $250

= 0