Question

If you flip a coin 20 times and it comes up heads every time, it is more likely to come up tails on the next flip.

TRUE OR FALSE

You should only buy house insurance if it maximizes expected value.

TRUE OR FALSE

Answer 1

a) Assuming the coin is fair, given that the first 20 flipts of the coins came up heads everytime, the probability of getting a tail or a head on the next flip dont depend on this result. It only depends on the fairness of the coin itself. Therefore the given statement is False, the probability of getting a tail on the next flip for a fair coin still remains the same equal to 0.5

b) A house insurance is not bought for maximizing the expected value but for maximizing the expected utility. There is a law of diminishing law of utility where the increase in utility decreases as the wealth goes up. Therefore our utility of holding a house is way more and therefore house insurance should be taken.