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Sunday, January 17, 2021

Smart Cats Have 25 Fifes, .... in Expectation

You’re a contestant on the hit new game show, “You Bet Your Fife.” On the show, a random real number (i.e., decimals are allowed) is chosen between 0 and 100. Your job is to guess a value that is less than this randomly chosen number. Your reward for winning is a novelty fife that is valued precisely at your guess.

What number should you guess to maximize the average value of your fifing winnings?

If you guess x[0,100], then the payoff function in terms of x and the randomly selected YU(0,100) is v(x|Y)={x,if Y>x;0,if Yx. So in expectation, we have V(x)=EY[v(x|Y)]=xP[Y>x]+0P[Yx]=x(1x100).

Since V(x) is continuously differentiable and concave, it is maximized exactly at ˆx which solves V(ˆx)=1ˆx50=0. That is, the optimal solution is to choose ˆx=50, at which point V(ˆx)=50(150100)=25.

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