An Answer Page for Exercise 2B

Exercise 2B

Suppose that the probability to win a certain game is exactly 1 / 10, and the payoff odds are ten to one.
Is this a fair game ?


We will solve the problem two different ways.

  Let B = size of Bet
  W = amount you stand to win
  p = P( win )   =   1 / 10
  g = odds against winning

Method 1 -- See if the payoff odds match the odds against winning

1 / p = 1 + g   10 = 1 + g       g   =   9   =   9 / 1

So, a fair game would require paying off at 9 to 1.
Thus, the answer is   No, the player has an advantage.

Method 2 -- Use the bias rule, where we compare W to gB

Since the payoff is 10 to 1,   W = 10B;   and,
since  g = 9,   W   =   10B   >   9B   =   gB.

W > gB     game is biased in player's favor.


We've shown ( in two different ways ) that the game is unfair.
If we wanted a fair contest, what should the payoff odds really be ?

First, let's verify that the current game gives the player a positive expectation.

  E = Wp + ( - B ) ( 1 - p )
  = ( 10B ) ( 1 / 10 ) + ( - B ) ( 9 / 10 )
  = B / 10   >   0

This is a better deal than you will find in a casino, where E is almost always negative.

  Let      x = payoff odds for a fair game
  Then   E = ( xB ) ( 1 / 10 )   +   ( - B ) ( 9 / 10 )

fair game     E = 0     xB / 10   =   9B / 10     x   =   9

To make the game fair, the payoff odds should only be 9 to 1.