University of Commerce Presidential Election Discussion

Description

John believes that the Democrat will be elected in a presidential election with probability 5/8. Mary believes the Republican will be elected with probability 3/4. Neither gives third party candidates any chance at all. They agree to bet $10 on the outcome at even odds. (Thus John will pay Mary $10 if the Republican wins, and she will pay him $10 if the Democrat wins.)

(Arbitrage theory) How would you be able to make money for sure by betting with John and Mary if they are both always ready to accept any bet that they believe has a nonnegative dollar expectation? (Given John’s expected dollar gain is $2.5 and Mary’s expected dollar gain is $5 (as calculated before))

Explanation & Answer:

100 Words

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