So betting 1$ at 3-1 means that winning means you get 4$ total, your original bet + your winnings? I had assumend you’d get 3$.
To which Robin Z replies, “Yes, you get $4.”
This confused me, too, for a while, so let me share with you the fruits of my puzzling.
You do get 3$ over the course of the whole transaction since at the time of the bet, you gave the bookmaker what you would owe him if you lose the bet (namely $1).
In other words, your 1$ bought you both a wager (the expected value of which is 0$ if 3-1 reflects the probability of the bet-upon outcome) and an IOU (whose expected value is 1$ if the bookmaker is perfectly honest and nothing happens to prevent you from redeeming the IOU).
The reason it is traditional for you to pay the bookmaker money when making the bet (the reason, that is, for the IOU) is that you cannot be trusted to pay up if you lose the bet as much as the bookmaker can be trusted to pay up (and simultaneously to redeem the IOU) if you win. Well, also, that way there is no need for you and the bookmaker to get together after the bet-upon event if you lose, which reduces transaction costs.
To which Robin Z replies, “Yes, you get $4.”
This confused me, too, for a while, so let me share with you the fruits of my puzzling.
You do get 3$ over the course of the whole transaction since at the time of the bet, you gave the bookmaker what you would owe him if you lose the bet (namely $1).
In other words, your 1$ bought you both a wager (the expected value of which is 0$ if 3-1 reflects the probability of the bet-upon outcome) and an IOU (whose expected value is 1$ if the bookmaker is perfectly honest and nothing happens to prevent you from redeeming the IOU).
The reason it is traditional for you to pay the bookmaker money when making the bet (the reason, that is, for the IOU) is that you cannot be trusted to pay up if you lose the bet as much as the bookmaker can be trusted to pay up (and simultaneously to redeem the IOU) if you win. Well, also, that way there is no need for you and the bookmaker to get together after the bet-upon event if you lose, which reduces transaction costs.