Oh, I see. You probably already understood that, but I’ll write it up for anyone else who didn’t initially grok the process (like me).
Intuitively, the original algorithm incentivises people to post their true estimates by scaling up the opponents investment with your given odds, so that it doesnt pay for you to artificially lower your estimate. The possible wins will be much lower; disproportionately to your investment, if you underestimate your odds. Conversely, the possible losses will not be covered by increased wins if you overestimate your chances.
It does not work if you scale the bets. If A believes he wins the bet half the time, and B believes it will be 90%, with the assumption of B being honest and both players setting the limit at 1 (for ease of calculation):
With A declaring 50%, the investment ratios would be:
A: 0.24
B: 0.56
With the original amount calculation that gives the expected value of
E(A) = (0.5 * 0.56 - 0.5 * 24) = 0.16
Whereas with scaled up bets A puts in 0.43 while B gives 1:
E'(A) = (0.5 * 1 - 0.5 * 0.43) = 0.285
With A declaring 20%, the numbers are:
A: 0.03
B: 0.17
E(A) = 0.5 * (0.17 - 0.03) = 0.07
While with scaled bets (B = 1, A = 0.18)
E'(A) = 0.5 * 1 - 0.5 * 0.18 = 0.41
Note how E(A) goes down if A lies, but E’(A) went way up.
Oh, I see. You probably already understood that, but I’ll write it up for anyone else who didn’t initially grok the process (like me).
Intuitively, the original algorithm incentivises people to post their true estimates by scaling up the opponents investment with your given odds, so that it doesnt pay for you to artificially lower your estimate. The possible wins will be much lower; disproportionately to your investment, if you underestimate your odds. Conversely, the possible losses will not be covered by increased wins if you overestimate your chances.
It does not work if you scale the bets. If A believes he wins the bet half the time, and B believes it will be 90%, with the assumption of B being honest and both players setting the limit at 1 (for ease of calculation):
With A declaring 50%, the investment ratios would be:
With the original amount calculation that gives the expected value of
Whereas with scaled up bets A puts in 0.43 while B gives 1:
With A declaring 20%, the numbers are:
While with scaled bets (B = 1, A = 0.18)
Note how E(A) goes down if A lies, but E’(A) went way up.