Imagine you are faced with the opportunity to play two coin flips, in which you get to call heads or tails prior to the flip of a fair, two-sided coin. (That is, heads and tails have equal likelihoods of occurring on any given flip.)
In Game A, a correct call wins you $1000; for an incorrect call, you neither win nor lose money. Game A costs $0 to play.In Game B, a correct call wins you $10,000; an incorrect call loses you $3,000. Game B costs $0 to play.
a. What is the expected value of each game?
b. If you had to play one of the two games, which would you choose and why? Please answer this as realistically as you can, given your (and/or your group members') actual preferences, wealth, risk aversion, etc. Do not answer this question for some hypothetical person. Imagine that you, yourself, have been given this actual choice and must now make a decision.
c. At what cost of your preferred game would you be indifferent between the two games? How did you arrive at this number?