The idea is that if the coin flip goes in the player’s favor, they win double their bet. After winning, they can either collect their winnings, or risk them all on another coin flip to have a chance at doubling them. The initial bet is fixed at, let’s say $1.
Mathematically, this seems like a fair game. The expected value of each individual round is zero for both house and player.
Intuitively, though, I can’t shake the notion that the player will tend to keep flipping until they lose. In theory, it isn’t the wrong decision to keep flipping since the expected value of the flip doesn’t change, but it feels like it is.
Any insight?
Once the player loses, the chain ends, and the house wins. So as long as the house can afford to keep pushing the player in to trying again, they’re going to create more opportunities for the player to return their winnings to the house.
Right, and as the chain continues, the probability of the player maintaining their streak becomes infinitesimal. But the potential payout scales at the same rate.
If the player goes for 3 rounds, they only have a 1/8 chance of winning… but they’ll get 8 times their initial bet. So it’s technically a fair game, right?
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They have a 50/50 chance each round. Doesn’t matter how many rounds they’ve won.
I’m looking at the game as a whole. The player has a 1 in 8 chance of winning 3 rounds overall.
the house can only make $1 per play, and the bettor can make a functionally unlimited amount.
see the martingale strategy. you are basically sticking the house with a martingale strategy in which you get to decide when they bet.
But the odds of the player managing to do so are proportionate. In theory, if 8 players each decide to go for three rounds, one of them will win, but the losings from the other 7 will pay for that player’s winnings.
You’re right that the house is performing a Martingale strategy. That’s a good insight. That may actually be the source of the house advantage. The scenario is ideal for a Martingale strategy to work.
That looks like the St. Petersburg Paradox. Much ink has been spilled over it.
The expected payout is infinite. At any point, the “rational” (profit-maximizing) decision is to keep flipping, since you wager a finite sum of money to win an infinite sum. It’s very counter-intuitive, hence called a paradox.
In reality, a casino has finite money. You can work out how many coin flips it takes to bankrupt it. So you can work out how likely it is to reach that point with a given, finite sum of money. Martingale strategies have already been mentioned.
Not quite the same, since in my scenario the player loses everything after a loss while in the St. Petersburg Paradox it seems they keep their winnings. But it does seem relevant in explaining that expected value isn’t everything.
If you have 100$, and you bet 1$ at a time, infinitely, you will lose.
More generally (simplified to assume you’re always betting the same amount):
P(ruin after X bets) = (edit: I removed my formula because it was wrong…but I’m sure you could mathematically prove a formula)
You’re saying that the player pays a dollar each time they decide to “double-or-nothing”? I was thinking they’d only be risking the dollar they bet to start the game.
That change in the ruleset would definitely tilt the odds in the house’s favor.
