Suppose a prediction market is trading a ticket worth $20 if Ben Bernanke wins the 2016 Nobel Prize in Ec

Question

Suppose a prediction market is trading a ticket worth $20 if Ben Bernanke wins the 2016 Nobel Prize in Economics and $0 if he doesn't. If the market value of the ticket is $8.80, what is the probability of Bernanke winning the 2016 Nobel Prize? Express the value as a percent (e.g. 20%), but do not include the percent (%) sign in your answer.

If there is not enough information provided to determine the answer, simply write "0" as your answer.

Answer 1

This is an expected value question. If the probability is 100%, then the ticket would be worth $20. If the probability is 0%, the ticket would be worth $0. 

 

Since the ticket has a market value of $8.80, that means we can set up the equation:

 

100%/20 = X/8.80

 

Solving the equation for X gets us:

 

20X = 880

 

X = 880/20 = 44

 

The market thinks there's a 44% chance that Bernanke will win the 2016 Nobel Prize in Economics.