The perfect first round buyout:
Suppose you had a perfect first round,
in that you guessed the first 32 games
correct. Congratulations. Strictly speaking, the risk-neutral buyout price from
the bank’s perspective (i.e., Mr. Buffet) is approximately $2. Now, this figure presumes that you got to this point
by dumb luck, and you will certainly
claim – and the house may believe –
that you got to this point because you
are very good at predicting basketball
games. After all, to have a 50 percent
probability of predicting the first round
correctly, you would need to have ~98
percent per-game prediction accuracy.
So, should you play? Sure, go
ahead. Expected value calculations
presume that you are going to do
something else with the money; this is
true for large amounts but typically not
for small. So it depends on what else
you would do with the money. In this
particular example,