[Math] the expected value of the following game

gamblingprobabilitystatistics

You are offered a game in which you select one bill at random from 4 bills: $1, $5, $10, and $20. You are given the choice to either keep the bill you drew or draw again with replacement, but if you draw the second time, you must keep it. What is the expected value of this game? How does the expected value change if you can choose to redraw a second time?

I got $12 for the first game, but was not sure how to tackle the variation with a second redraw

Best Answer

First of all the expected value for the first pick is $(1+5+10+20)/4 = 9$

Then it depends on whether the bill is returned to be selected from.

If it's returned it's quite straight forward. The strategy must be that if you don't pick the 10 or 20 bill you try again. So in 25% of the cases you settle for your 20, 25% for the 10 and otherwise try again with an expected value of 9. So the result would be $20/4 + 10/4 + 9/2 = 12$.

If it's not returned the expected result of the second draw is dependent on the first bill:

  • 1 means that the expected value of the next is $(5+10+20)/3 = 35/3$, it's correct to draw the second here
  • 5 means $(1+10+20)/3 = 31/3$ that is draw the second here too
  • 10 means $(1+5+20)/3 = 26/3$ that is we do not draw the second
  • 20 means $(1+5+10)/3 = 16/3$ that is we do not draw the second.

So the result is that in 25% of the case we settle for 20, 25% we settle for 10, 25% we draw a second bill with the expected value of 31/3, and 25% we draw a second with the expected value of 35/3. So the result is

$${20 + 10 + 31/3 + 35/3\over 4} = {60+30+31+35\over12} = 13$$