Quote:
Originally Posted by brrrrr
The value of one envelope is half the value of the other.
You have the $5000 envelope. The other is either $2500 or $10k.
If those two possibilities are equally likely, the EV of switching is $12500/2 = $6250. That's more than $5000 so unless you're extremely risk averse you should switch.
The question is, are $2500 and $10k equally likely? If this was a real world situation, I'd be trying to estimate some kind of probability distribution and it might not be evenly balanced between the two possibilities. I'd want to know the net worth of my benefactor. There's only so much money anybody could/would put in an envelope.
So for example, I'm dealing with someone whose net worth is $10 million. I'm pretty sure he's not going to give away any more than $1 million. To my surprise, I open an envelope with $1 million. In that case I'm not switching, because no way does the other envelope contain $2 million. If I thought the probability of $2 million was equal to the probability of $500k I'd do the switch, but it isn't in the situation I described.