Siegel paradox

Martín Egozcue
Department of Economics, University of Montevideo, and FCS Universidad de la Repub-
lica del Uruguay, Montevideo 11600, Uruguay

Luis Fuentes García

Departamento de Métodos Matemáticos e de Representación, Escola Técnica Superior de
Enxeñeiros de Camiños, Canais e Portos, Universidade da Coruña, 15001 A Coruña,
Spain.

Riµcardas Zitikis
Department of Statistical and Actuarial Sciences, University of Western Ontario, London,
Ontario N6A 5B7, Canada.

Abstract.
..
..

Keywords and phrases: two-envelope paradox; ...

1 Introduction
The two envelope paradox has emerged as one well known paradox. Many applications
adjust to its framework.
There are many versions of the two envelope problem. We will follow McDonnell and
Abbott (2009) framework and keep their notation as closed as possible for the reasons that
we will following explain. Consider a one trial game between a gambling house and one
player. The gambling house randomly chooses an amount X with continuous probability
density function f (x). This amount is placed in one envelope, twice this amount is placed
in another envelope. The player is o¤ered the envelope with the smaller amount with
probability p, observes the amount of money x in it, then decides whether or not to
switch the envelope according to the value of a certain function S(x) 2 [0; 1], which is
interpreted as the probability of switching after observing y. McDonnell and Abbott
(2009) present several switching strategies, argue in favour of decreasing functions S(x),
and illustrate them with the Cover’s function
ax
SC (x) = e ; (1.1)

1
where a > 0 is a parameter, which is known in the Survival Analysis literature as the
exponential survivor function. Somewhat surprisingly, however, not all ‘good’switching
functions S : (0; 1) ! [0; 1] are decreasing, and we shall illustrate this fact with an
example later in this paper –it depends on the distribution of X.
Coming now back to our general discussion, the absolute average gain using a switching
strategy S : (0; 1) ! [0; 1] is given (McDonnell and Abbott, 2009) by the integral
Z 1
G(S) = S(x)xhf (x)dx; (1.2)
0

where
1 x
hf (x) = pf (x) (1 p)f :
4 2
McDonnell and Abbott (2009) present a analysis of the two-envelope paradox, derive the
above formula for the gain G(X), and …nd winning strategies S : (0; 1) ! [0; 1] for some
distributions. They also suggest several open problems, such as:

1. [(i)]

2. …nding optimal strategies for speci…c distributions of X, and

3. …nding winning strategies when only some moments of X are known.

In this paper we will tackle these problems and o¤er solutions. But …rst, we need to
agree on the de…nition on ‘optimal’and ‘winning’strategies. In general, every strategy is
associated with a switching function S(y), which takes on values in the interval [0; 1] and
is Borel measurable so that the integrals that we shall deal with would exist. Denote the
set of such functions or, in other words, strategies S : (0; 1) ! [0; 1] by S.

De…nition 1.1 We say that a strategy S0 2 S is losing if G(S0 ) < 0, not losing if
G(S0 ) 0, winning if G(S0 ) > 0, and optimal if G(S0 ) = supS2S G(S). (Note that
optimal strategies may not be winning, but they are never losing strategies.)

Optimal strategies are determined by the sign of hf (x). Namely, given a probability
density function f , an optimal strategy SO;f 2 S is given by the equation

SO;f (x) = 1fz2(0;1): hf (z)>0g (x); (1.3)

where 1A (x) is the indicator function, equal to 1 when x 2 A and 0 otherwise. Hence,
determining SO;f 2 S is equivalent to determining all z 2 (0; 1) such that hf (z) > 0.

2
This can easily be done for speci…c parametric distributions, and we shall do so for a
battery of them in the next section. For a number of such distributions, but certainly not
for all as we shall see in the next section, optimal strategies are determined by certain
thresholds x0 in the following way:

SO;f (x) = 1(0;x1 ) (x) (1.4)

which means that we switch if x < x1 and do not switch if x > x1 . But optimal strategies
may not always be of the form (1.4), and we shall see in the following section that they
can, for example, be indicators such as 1(x0 ;x1 ) and 1(x0 ;1) .
The above ‘parametric’ discussion has been based on our subjective belief that one
speci…c distribution or another governs the values of X, which may or may not be practical.
When having such information is not practical, we relax this subjectivity in Section ??
by departing from any speci…c parametric distribution and formulate some necessary
assumptions in terms of moments, such as second and third order moments of X. Using
such moments, we shall then be able to approximately determine the sets of x > 0 such
that hf (x) > 0. We note at the outset that, naturally, we shall not be able to determine
the sets precisely as is the parametric case, but the obtained results will nevertheless lead
to winning strategies.
Our approach is to note that we can express:

E[X 10:5b X b] = E[X 1X b ] E[X 10 X 0:5b ]

Then we can …nd a lower bound of E[X 1X b ] and an upper bound of E[X 10 X 0:5b ].

The trouble with the second approach is that the optimal b in these bound may not
coincide. Anyway, this approach could use some Chebychev bounds.
Some notation. We will restrict our analysis to random variables with positive support
2
and we de…ne the mean , variance and moments mi = E[X i ]. Recall that :

2 2
= m2 :

1.1 Chebychev´s type inequalities

Theorem 1.1 For t 0; s :

3
 2
P (jX j t) (1.5)
t2
m2
P (jXj t) (1.6)
t2
m2
P (X t) (1.7)
t2
2
P (X t) 2
(1.8)
+ t2
2
P (X s) 2
(1.9)
+ (s )2

Proof. The …rst two follows from Chebychev inequality; the third noting that P (X
t) P (jXj t). The fouth is Cantelli ´s inequality. The …th follows from Cantelli´s
inequality noting that P (X s) = P (X s ).

Remark 1.1 The bound 1.9 is sharpper than 1.7. Noting that:
2 2
m2 m2 m2
= =
s2 2 + (s )2 s2 m 2 + s2 2 s
m22 + s2 m2 2 sm2 m2 s2 + 2 s2
=
s2 (m2 + s2 2 s)
m22 2 sm2 + 2 s2 (m2 s )2
= >0
s2 (m2 + s2 2 s) s2 ( 2 + (s )2 )

1.2 Bounds for E[X 1X b ].

m2
Theorem 1.2 If b m1
then:

m3 m22
E[X 1X b ] (1.10)
m 3 + b2 2bm2

Proof. We de…ne a random variable Y with positive support and density function g(y) =
yf (y)
. It is well de…ne as:
Z 1 Z 1
1
g(y)dy = yf (y)dy = 1:
0 0

Its moments are:

Z 1
i 1 k E[X k+1 ] mi+1
E[Y ] = y yf (y)dy = = :
0

Now: Z 1
1
E[X 1X b ] = xf (x)dx = P (Y b) = P (Y b):
b

4
 m2
Applying inequality 1.9 to Y ; we need that: b E[Y ] = m1
:
m22
E[Y 2 ] E[Y ]2 m3 m3 m22
E[X 1X b ] = P (Y b) = m3 = :
E[Y 2 ] + b2 2bE[y] + b2 2b m2 m3 + b2 2bm2

m2
Theorem 1.3 1. If b 2m1
then:

b 2 b(m2 2
)
E[X 1X b ] + (1.11)
m2 m 2 + b2 2b
m2
2. If b 2m1
then:

1 p b(m2 ) 2
E[X 1X b ] b+ m2 2 b + b2 + (1.12)
2 m 2 + b2 2b
Proof. We have:
E[X 1X b ] = E[maxf0; X bg] + bE[1X b ]:

We use two well known inequalities. Scarf ´s inequality:

8
>
> b 2
si b m2
>
> m2 2
>
>
<
E[maxf0; X bg] 1 p
>
> b + m 2 2 b + b2 si b m2
>
> 2 2
>
>
:

and Cantelli´s inequality (1.9):

2
m2
E[1X b ] :
m 2 + b2 2b
Combining we get the desire bound.

Remark 1.2 It will exercise to compare this result with the other bound, may be we will
need the third moment.

Noting that:
E[X 1X b ] = E[X] E[X 1X b ]

we deduce the following corollaries.

m2
Corollary 1.1 If b m1
then:

m3 m22
E[X 1X b ] (1.13)
m 3 + b2 2bm2

5
 m2
Corollary 1.2 1. If b 2m1
then:

b 2 b(m2 2
)
E[X 1X b ] (1.14)
m2 m 2 + b2 2b

m2
2. If b 2m1
then:

1 p b(m2 2
)
E[X 1X b ] b m2 2 b + b2 (1.15)
2 m 2 + b2 2b

1.3 Bounds for E[X 10 X 0:5b ].

Lemma 1.1
E[X 10 X 0:5b ] 0:5b (1.16)

Proof. Obviously: Z 0:5b

E[X 10 X 0:5b ] = xf (x)dx 0:5b
0

Theorem 1.4 If b 2 then:

2
E[X 10 X 0:5b ] 2
(1.17)
+( 0:5b)2

Proof. Let Y = X; (Y ) = (X) and V ar(Y ) = V ar(X) hold. We use Cantellis

inequality (1.9) forY :
2
E[X 1X 0:5b ] = P( X 0:5b) = E[Y 1Y 0:5b ] 2 +( 0:5b)2

We need that 0:5b , hence 0:5 2 .

Remark 1.3 This bounds improve the trivial one if :

- b > 2 or
0:5( 0:5b)2 b
- 2 (low covariance).
1 0:5b

1.4 Combined bounds E[X 1X b ] and E[X 10 X 0:5b ]:

We can combine the previous bounds and …nd the b such that we get a positive bound.
....

6
2 Conclusions

Acknowledgements
The authors gratefully acknowledge their partial research support by the Agencia Na-
cional de Investigación e Innovación (ANII) of Uruguay, and the Natural Sciences and
Engineering Research Council (NSERC) of Canada.

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