Depends on how big your bankroll is. Use the "certainty equivalence" formula:
CE = EV - Variance/(2xBankroll)
If you have a monster bankroll like Warren Buffet, CE approaches EV, otherwise CE is always less than EV. Another way to think about it is that you can't get the EV out of a gamble unless you have a monster bankroll. More normal bankrolls can only get a fraction of the EV out, small bankrolls can't get any and in fact can lose money in the chase for EV.
http://en.wikipedia.org/wiki/Risk_premium
--- In vpFREE@yahoogroups.com, Bob Dancer <bobdancervp@...> wrote:
>
>
>
>
>
>
>
> On last
> night's "Gambling with an Edge," I posed a question that Munchkin and
> I plan to address on the air next Thursday. This might well be a subject that's
> appropriate for discussion here. I don't intend to participate in this
> discussion other than setting it up --- although I will tell you where I stand
> on the issue --- but rather "save" my analysis for "on the air"
> next week.
>
>
>
> In
> September, the Palms Friday-Saturday drawings give the winners a choice. The
> winners can select a guaranteed $1,500, or they can play a game. In this game,
> there four envelopes with a 0, 1, 2, 3 inside in some order. Players arrange
> the envelopes (not knowing what's inside), and then read off the number in
> dollars. The greatest amount you can win is $3,210 and the smallest is $123.
>
>
>
> The average
> (mean) of the equally-likely choices is $1,666.50. The average (median) of the
> choices is anything between $1,320 and $2,013, including, of course, the
> fallback prize of $1,500.
>
>
>
> What we
> call EV (or ER) in video poker is $1,666.50 --- if we're willing to
> "gamble." You could give up about 10% of that, chicken out, and keep the $1,500
> with no gamble.
>
>
>
> To me this
> is a no-brainer. I'd go for the higher-EV option 100% of the time. I'd do it if
> the choice were $1,666.50 versus a guaranteed $1,650. This is not a close
> decision for me. I'm sure many players with chicken out and keep the $1,500.
>
>
>
> What would
> you do? And why?
>
>
>
> I don't
> think there are any "cash versus free play" differences between the
> two choices. Even if there are in the casino, let's ignore them for the sake of
> this discussion.
>
>
>
> Bob
>
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>
>
>
> [Non-text portions of this message have been removed]
>
