The Two-Envelope Paradox – Edwin Meyer

Date: Thu. January 24th, 2013, 4:15 pm-5:15 pm
Location: Rockefeller 301

One of the most puzzling paradoxes in philosophy, mathematics and finance is the two-envelope paradox (http://en.wikipedia.org/wiki/Two_envelopes_problem). It is many years old, but it still generates 5-10 publications each year as many disciplines each have their own viewpoints and methods of attack.

Consider two sealed envelopes, one of which contains twice as much money as the other. You get to pick one and keep the amount inside. You pick one and reason thusly, “My envelope contains an amount which I’ll define as X. The other envelope must contain one-half X or twice X with a 50 percent chance of either. So the average value in the other envelope is 1.25 X. I picked the wrong envelope!” Of course, the reasoning is the same if you pick either envelope. If you are allowed to switch, the reasoning is still valid after you switch; hence the paradox. How can one envelope be preferred over the other?

Edwin F. Meyer, a professor of physics at Baldwin Wallace University (PhD from CWRU in 1988) will present the solution to the paradox and discuss its ramifications in the area of business, finance and risk management.