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Bob's best response to a revealed coin bias

Question

Alice and Bob each choose the heads probability of their own coin and then each flip once. If both coins show heads, Alice pays Bob $6; if both show tails, Alice pays Bob $4; if they differ, Bob pays Alice $5. Alice must announce her heads probability p1p_1 before Bob chooses his, p2p_2. If p1=34p_1=\tfrac34, Bob has positive expected profit exactly when p2∈(a,1)p_2\in(a,1) for a reduced fraction aa. What is aa?

Short answer

a=1124a=\tfrac{11}{24}. Weighting Bob's payoffs +6+6, +4+4, −5-5 by the outcome probabilities and collecting terms, his expected profit is (20p1−9)p2+4−9p1(20p_1-9)p_2+4-9p_1, linear in p2p_2. At p1=34p_1=\tfrac34 this becomes 6p2−1146p_2-\tfrac{11}{4}, which is positive exactly when p2>1124p_2>\tfrac{11}{24}.

Adapted from QuantQuestions.io; question and answer rewritten by SelfMadeQuant.com.

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