[Math] The probability of Breakeven On a Coin Toss Game

probabilityprobability theory

I was walking the other day around my work office in NYC and thought of this interesting scenario in a game of coin flips.

You have $500 in your pocket. This is your entire life savings.

You play a game of coin flips with a two sided, fair coin, 5 times. Your winnings and your losses is the same as the capital you risk. So if you risk $$100, you can either win an addition $100 or lose the entire $100 you invested.

You argue that since the odds are 1:1, it doesn't matter what you pick, so you choose tails for each of the 5 coin flips betting a $100 each, successively as the coins are flipped.

You play the game and the outcomes are all heads, HHHHH. You've lost your entire $500 of life savings.

You have two options. 1) Walk away empty handed knowing your unlucky. Or 2) you go to a loan shark down the alley to loan you $100 to play the game one.. more..time. Who knows maybe you'll break your unlucky streak the 6th time around?

Question is, should you take a loan and play the game 1 more time to even things out knowing the 6th coin flip is still 50-50 and completely independent from the last 5?

Best Answer

Knowing that the 6th coin flip is still 50-50 and completely independent from the last 5 should make the entire intro of your question void. You should ask - is it worth borrowing \$100 in order to have a 50-50 chance of winning an additional \$100. Everything else is just just noise.

To answer this just think about the simple goal of maximising the probability of future prosperity. So if you owe another lender \$100 and they will kill you in an hour if you don't repay them - then take the risk and you have a 50-50 chance of living (yay!). However, if you are not in harsh debt and the loan shark will kill you if you don't pay them back tomorrow then you are taking a 50-50 chance of getting murdered (bad idea!).

I know this was not a very 'mathsy' answer, but neither was the question :P

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