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Equity calculation question?
Posted By: Rick Janowski
Date: Sunday, 16 October 2016, at 9:30 a.m.
In Response To: Tournament Prize Money Conundrum (Timothy Chow)
If x is taken as the lowest value in the two envelopes, then the value in each seperate envelope is 1.5x +/0.5x, and opening an envelope and seeing a value doesn't change this fundamental relationship.
There must be some breakdown in the equity calculation approach (or in the similar risk reward approach).
Normally a calculation to determine weighted average equity uses data which are either fixed values or mean values from other subsets. In the calculation used in this example we are not using mean values but instead a maximum value from one range of values (20004000) and a minimum value from another range in values (10002000). The error range in the former is twice as large as in the latter. This appears to be the source of the inconsistency: computing mean equity from from extreme values in probability ranges rather than from fixed or subset mean values.

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