The optimal way of dividing the bet three ways

[Hill]

Homework Statement

In the Olympic finals, only three teams are represented; USA, England, and China. Svetlana believes the USA will win and offers even odds of 1:1. Roberto is supporting England and is offering 2:1 odds. (So, if England wins, Roberto keeps his money. If one of the other teams wins, Roberto pays $2 for each dollar bet.) Finally, Jeff supports China as given by his 5:4 odds. Determine the optimal way of dividing $100 to bet that ensures the largest winning.

Relevant Equations

earnings=gain-loss

If I bet $s$ with Svetlana, $r$ with Roberto, and $j$ with Jeff, my earnings would be,

if USA wins, $-s+2r+ \frac 5 4 j$,

if England wins, $s-r+\frac 5 4 j$,

if China wins, $s+2r-j$,

where $s+r+j=100$.

I think that "the optimal way ... that ensures the largest winning" is to make the earning independent of the result of the final. Then, I get three equations with three unknowns,

$-s+2r+ \frac 5 4 j=s-r+\frac 5 4 j$
$-s+2r+ \frac 5 4 j=s+2r-j$
$s+r+j=100$.

The solution is to bet $17.65 with Svetlana, $35.29 with Roberto, and $47.06 with Jeff.

 

[PeroK]

You can calculate a general solution based on any number of different odds.

England is not an Olympic nation. It's Great Britain.

 

[FactChecker]

Determine the optimal way of dividing $100 to bet that ensures the largest winning.

"the optimal way ... that ensures the largest winning" is to make the earning independent of the result of the final.

IMO, if this is really the intent of the question, a better way of phrasing it would be "with the largest guaranteed win". That would be a "min-max" problem, where you are maximizing the minimum possible winnings. Otherwise, I would interpret problems like this to be talking about maximizing expected winnings.

 

[Hill]

IMO, if this is really the intent of the question, a better way of phrasing it would be "with the largest guaranteed win". That would be a "min-max" problem, where you are maximizing the minimum possible winnings. Otherwise, I would interpret problems like this to be talking about maximizing expected winnings.

I assume that the intent of the question is rather former than latter, because the text starts discussing the expectation values a bit later.

 

[PeroK]

Suppose there are $n$ mutually exclusive possibilities and that (precisely) one must happen. You are offered odds of $a_k:b_k$ for each ($k = 1 \dots n$). The return on a bet of one unit, if event $k$ happens, is:
$$r_k = 1 + \frac{a_k}{b_k} = \frac{a_k+b_k}{b_k}$$You can achieve a guaranteed return (net win or loss) by betting on each event with a proportion $x_k$, where (for all $k, l$):
$$x_kr_k = x_lr_l$$Hence:$$x_l = \frac{r_k}{r_l}x_k$$Now, for all $k$:
$$1 = \sum_{l=1}^{n}x_l = \sum_{l=1}^{n}\frac{r_k}{r_l}x_k = \bigg (\sum_{l=1}^{n}\frac{1}{r_l}\bigg )r_kx_k$$Hence:$$x_k = \frac{1}{r_k(\sum_{l=1}^{n}\frac{1}{r_l})} = \frac{\frac{b_k}{a_k+b_k}}{\sum_{l=1}^{n}\frac{b_l}{a_l+b_l}}$$Note that we can interpret $p_k = \frac{b_k}{a_k+b_k}$ as an estimated likelihood for event $k$. These are not probabilities, simply estimates that may have no relation to how likely the event is. The people offering the odds may be completely wrong. In any case, we have:
$$x_k = \frac{p_k}{\sum_{l=1}^{n}p_l}$$In a different context, where these are probabilities, you can guarantee getting precisely your money back by betting $x_k = p_k$.

Finally, the amount you end up with is:
$$r = x_kr_k = \frac{1}{\sum_{l=1}^{n}p_l}$$This is greater than 1 (net win) iff the sum of all the estimated likelihoods is less than 1. And. it's a net loss if the sum of all the estimated likelihoods is greater than 1.

If you check the odds for any competition with any specific bookmaker, the estimated likelihoods will, indeed, sum to greater than 1. If not, then you can beat the bookie, as it were. Or, you can go round different bookmakers looking for a total estimate for all possibilities of less than 1.

 

[Hill]

These are not probabilities, simply estimates that may have no relation to how likely the event is.

The text calls these, "implied probabilities."

 

[haruspex]

I would interpret problems like this to be talking about maximizing expected winnings.

To calculate expected winnings (without ensuring the same payoff in all eventualities) you would need some basis for the actual probabilities of who wins.

 

[FactChecker]

To calculate expected winnings (without ensuring the same payoff in all eventualities) you would need some basis for the actual probabilities of who wins.

Good point, and I expected that in the problem statement, but it's not there.
That being said, I agree with the OP interpretation of the problem although I think the wording of the problem statement could be improved, as I said in my post,

 

[DEvens]

England is not an Olympic nation. It's Great Britain.

Great Britain is the island (well, large island plus some much smaller islands) including England, Scotland, and Wales. That is, it is the geographic region.

The sovereign nation is The United Kingdom. Or, more completely, The United Kingdom of Great Britain and Northern Ireland. And often referred to as the UK.

 

[DEvens]

$-s+2r+ \frac 5 4 j=s-r+\frac 5 4 j$
$-s+2r+ \frac 5 4 j=s+2r-j$
$s+r+j=100$.

The solution is to bet $17.65 with Svetlana, $35.29 with Roberto, and $47.06 with Jeff.

Probably you are better off to use the fractions until the very end. Solving your first equation gives this.

$r = \frac{2}{3} s = \frac{6}{9} s$

Your second gives this.

$j = \frac{8}{9} s$

Putting that in your third is this.

$s+\frac{6}{9} s+\frac{8}{9} s= \frac{23}{9} s = 100$.

And so that gives the following.

$s = \frac{9}{23} \times 100 , j = \frac{8}{23} \times 100 , r = \frac{6}{23} \times 100$

This is a form that easily lets you see that the sum works since 9 plus 8 plus 6 is 23.

You will note I don't get the same order you do. Note that Jeff is in the middle of the odds so must be in the middle of the bet. The odd thing is that Svetlana, offering the lowest odds, should get the biggest bet. But note that we are trying to get the same result regardless of who wins.

Also, the numerical values are not the same. I suspect you did something wrong in your solution. (Or I did. I did not have much coffee today.)

 

[Hill]

Probably you are better off to use the fractions until the very end. Solving your first equation gives this.

$r = \frac{2}{3} s = \frac{6}{9} s$

Your second gives this.

$j = \frac{8}{9} s$

Putting that in your third is this.

$s+\frac{6}{9} s+\frac{8}{9} s= \frac{23}{9} s = 100$.

And so that gives the following.

$s = \frac{9}{23} \times 100 , j = \frac{8}{23} \times 100 , r = \frac{6}{23} \times 100$

This is a form that easily lets you see that the sum works since 9 plus 8 plus 6 is 23.

You will note I don't get the same order you do. Note that Jeff is in the middle of the odds so must be in the middle of the bet. The odd thing is that Svetlana, offering the lowest odds, should get the biggest bet. But note that we are trying to get the same result regardless of who wins.

Also, the numerical values are not the same. I suspect you did something wrong in your solution. (Or I did. I did not have much coffee today.)

You are correct. I made a mistake.
Here is my calculation corrected:

From the first equation I get

$-s+2r=s-r, r=\frac 2 3 s$.

From the second,

$-s+\frac 5 4 j=s-j, j=\frac 8 9 s$.

Then the third is

$s+\frac 2 3 s +\frac 8 9 s=100$,

which is the same as yours.

I thought that what I did from the beginning but got somehow a wrong answer.

 

[PeroK]

Great Britain is the island (well, large island plus some much smaller islands) including England, Scotland, and Wales. That is, it is the geographic region.

The sovereign nation is The United Kingdom. Or, more completely, The United Kingdom of Great Britain and Northern Ireland. And often referred to as the UK.

The Olympic team is Great Britain. Athletes from Northern Ireland have the option to compete for Great Britain or Ireland.

https://en.wikipedia.org/wiki/Great_Britain_at_the_Olympics

Rory McIlroy, for example, who is from Northern Ireland, chose to play for Team Ireland at the Toyko and Paris Olympics.

 

[FactChecker]

This problem is a problem to maximize the minimum payoff. I am trying to see a simple, conceptual way to interpret that as the equalities of the OP, but I can not see it. Is there a simple way?

 

[PeroK]

This problem is a problem to maximize the minimum payoff. I am trying to see a simple, conceptual way to interpret that as the equalities of the OP, but I can not see it. Is there a simple way?

It's not about maximising or minimising something. It's about guaranteeing a fixed return.

 

[FactChecker]

It's not about maximising or minimising something. It's about guaranteeing a fixed return.

"guaranteeing" translates to finding the minimum result as a function of the problem parameters. * Maximizing the guaranteed result translates to maximizing the minimum result. A min-max problem solution is a fixed result, given the solution parameters.

* ADDED: a "guarantee" usually allows a better result than the guarantee. That is, it means "guarantee at least". It does not usually mean that the result will always be exactly that value. For that, it would be better to say "guarantee exactly"

 

[pbuk]

This and your previous question are very poorly worded.

In general, betting odds are offered by bookmakers. When a bookmaker offers odds of 2:1 on England winning that means if you bet £1 and England wins they pay out £3 (£2 winnings plus your bet of £1). If England lose they keep your £1.

Here, "Roberto" is described as offering a bet which pays out £2 (plus, although it is misleadingly not stated in the question, the £1 bet) if England LOSE. In the real world, it is unusual for a bookmaker to offer (conventional) odds on a team losing.

What is the source of these questions, and what is your learning objective?

 

[Hill]

What is the source of these questions, and what is your learning objective?

The source is Mathematics of Finance: An Intuitive Introduction (Undergraduate Texts in Mathematics) by Donald G. Saari.

The objective is to familiarize myself with a new (to me) subject.

 

[PeroK]

This and your previous question are very poorly worded.

In general, betting odds are offered by bookmakers. When a bookmaker offers odds of 2:1 on England winning that means if you bet £1 and England wins they pay out £3 (£2 winnings plus your bet of £1). If England lose they keep your £1.

Here, "Roberto" is described as offering a bet which pays out £2 (plus, although it is misleadingly not stated in the question, the £1 bet) if England LOSE. In the real world, it is unusual for a bookmaker to offer (conventional) odds on a team losing.

What is the source of these questions, and what is your learning objective?

.
I tend to agree. I see now that the odd are not on mutually exclusive events.

 

[pbuk]

I see now that the odd are not on mutually exclusive events.

Indeed. I cannot believe this is what the author intended - see below.

The source is Mathematics of Finance: An Intuitive Introduction (Undergraduate Texts in Mathematics) by Donald G. Saari.

Wow, that book should be a lot better than it appears to be from these two questions. I can only imagine that this material is so early in the book and at such a basic level that it has not been properly reviewed. This appears to be supported by the author's lecture series which you can see here:



He introduces a similar problem at 15:30 in the first lecture, right after the introductions and administrative matters. By 18:34 he is asking himself "did I get that screwed up"? He continues on regardless and makes the point he wants to make - which is that you can often ensure a fixed net financial outcome even when there is a range of uncertain events.

The next lecture he has moved on from this introductory material to option pricing, where the material seems a lot better thought through.

The objective is to familiarize myself with a new (to me) subject.

I think you have two options (pardon the pun) here:

• Ignore the weaknesses in this introductory material and move on to the next chapter; or
• if you are uncertain about these basic calculations (but it doesn't look as though you are, because your answer is approximately arithmetically correct), work through a more basic text.

 

[Hill]

• Ignore the weaknesses in this introductory material and move on to the next chapter

Thank you. I do just this ^^^^.