The Two Envelopes Paradox: Exploring Expected

Value and Rational Choice

David J. Runger
October 30, 2007

The feeling of surprise and discomfort that we experience when we en-

counter a paradox tells us that our understanding of the subject at hand is
somehow incomplete [2]. A paradox invites us—perhaps even shames us—
to deepen our understanding of the subject and to eliminate the apparent
contradiction that is the essence of any paradox. In the following pages, we
will grapple with the Two Envelopes Paradox, a paradox of probabilities.
One of the earliest presentations of this paradox was in 1988 as a puzzle
for readers of the Journal of Economic Perspectives. The readers’ response
was “overwhelming”, according to the editor of the “Puzzles” column, Barry
Nalebuff [5], and it’s easy to see why. Beguiling in its simplicity, the paradox
entices us with the prospect of a quick and easy resolution—but unraveling
the Two Envelopes Paradox is anything but child’s play.

The Paradox

Suppose that a game show host sets two envelopes before you, telling you
(truthfully, of course!) that each envelope contains a check written for a
positive, real-number sum and that one of the envelopes contains exactly
twice as much money as the other. Luckily for you, you are allowed to take
one of the envelopes home with you! What’s more, you can even look into
one (but only one) of the envelopes before you make your final decision about
which to take. Will you take the envelope into which you peek, or will you
switch your choice to the other envelope? Does it matter either way?

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 Figure 1: To switch or not to switch?

Let’s say that you choose Envelope A, take a peek inside, and find a check
worth $a. Having seen how much money is in Envelope A, should you switch
your choice to Envelope B? Reflecting on the fact that you chose Envelope
A randomly, you might reason that you are just as likely to have chosen the
greater prize as to have chosen the lesser prize, so you might as well stick
with the envelope you have; switching envelopes won’t improve your chances
of finding the larger prize. This reasoning certainly looks sound, but having
learned a lesson the hard way from a financially taxing trip to Las Vegas,
you decide to double-check your conclusion by calculating the expected value
of taking Envelope B instead.
If Envelope A contains the smaller prize, then Envelope B contains $2a;
if A contains the larger prize, then B contains $a/2. If the probability that
you chose the larger envelope is the same as the probability that you chose
the smaller envelope, then the probability of each is 1/2, since they must
sum to 1. Thus, thinking of B as a random variable representing the amount
of money in Envelope B, we have

E(B) = (1/2) · (2a) + (1/2) · (a/2) = 5a/4.

So you can expect to win 25% more, on average, just by switching! But
this contradicts our original idea that switching envelopes would be useless.
Was that thinking somehow flawed? Is something wrong with our expected
value calculation? Or, undoubtedly the worst possible case, does 0 = 1?

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The Paradox Defanged and Dethroned

The paradox can be resolved by noting an incorrect assumption made in the

expected value calculation: the assumption that the probability that you
chose the larger envelope is the same as the probability that you chose the
smaller envelope. This assumption is indeed valid before you look in Envelope
A and see how much money it contains, so P (A = S) = P (A = L) = 1/2,
where S is a random variable representing the amount of money in the smaller
envelope and L is a random variable representing the amount of money in
the larger envelope. (Thus, P (A = S) is the probability that Envelope A
contains the smaller amount of money, and P (A = L) is the probability that
Envelope A contains the larger amount of money.) Once you see that the
envelope contains $a, however, the assumption is no longer necessarily true,
so P (A = S|A = a) does not necessarily equal P (A = L|A = a), and neither
necessarily equals 1/2.
For example, suppose that the total amount of money in the world is
$30. Before you open Envelope A, the chance that it contains the smaller
check is 1/2, and the chance that it contains the larger check is 1/2. If you
were to see $20 in Envelope A, however, then you could conclude that the
probability that Envelope B contains the larger sum is not 1/2, but 0, since
it is impossible for B to contain $40 in a world in which only $30 exist.
Now we are beginning to see the essential ideas required to resolve the
paradox. Specifically, we must consider the underlying probability distri-
butions for the amount of money in the two envelopes; then, given these
distributions, we must apply our knowledge of the amount of money in En-
velope A to calculating the probability that Envelope B contains a/2 and the
probability that B contains 2a. We must utilize the information gained by
looking at the check in Envelope A. Then, having recalculated these proba-
bilities with respect to our knowledge that A contains a, we can perform a
correct expected value calculation [4, 5]. Essentially, the paradox arises when
we incorrectly use prior probabilities in our expected value calculation, even

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after we acquire relevant information that would allow us to determine more
accurately the probability that Envelope B contains $2a vs. $a/2.
To summarize this prose with a formula,

E(B) = P (A = S|A = a) · (2a) + P (A = L|A = a) · (a/2),

where A is a random variable representing the amount of money in the en-

velope we have chosen, S is a random variable whose range is the possible
values of the smaller check, and L is a random variable whose range is the
possible values of the larger check [4]. Thus, for E(B) to equal 5a/4 for all
a, it is not sufficient to say that P (A = S) = P (A = L) = 1/2 for all a.
Rather, it must be true that P (A = S|A = a) = P (A = L|A = a) = 1/2 for
all a.

When the ranges of S and L have upper bounds It is impossible,

however, for P (A = S|A = a) = P (A = L|A = a) = 1/2 for all a if we assume
that there is an upper bound, c, on the total amount of money available to
be put into the envelopes. To see why, consider that, in this case, the upper
bounds on the ranges of S and L would be c/3 and 2c/3, respectively. That
is, P (S > c/3) = 0 and P (L > 2c/3) = 0. If we find in Envelope A an
amount a1 ∈ (c/3, 2c/3], then we know that P (A = S|A = a1 ) = 0 6= 1/2
and P (A = L|A = a1 ) = 1 6= 1/2. Thus, if the random variables S and
L have upper bounds, it cannot be true that P (A = S|A = a) = P (A =
L|A = a) = 1/2 for all a. Therefore, the initial paradoxical expected value
calculation, E(B) = 5a/4, is not true for all a, resolving the paradox (when
we assume an upper bound on the amount of money that can be put in the
envelopes).

Can S range from 0 to ∞? What if we suppose that the probability dis-

tributions governing S and L are unbounded? Might it then be possible that,
for all a, P (A = S|A = a) = P (A = L|A = a) = 1/2, thereby resurrecting
the paradox? (Of course, such a scenario is impossible in reality, where only

4
a finite amount of money exists, but the case is nonetheless interesting and
informative to consider.) The short answer is that, no, this is not possible
because this scenario would imply that S and L are uniform on the interval
(0, ∞) [4], which is impossible [3].
In order for our original expected value calculation to be correct, we must
convert

E(B) = P (A = S|A = a) · (2a) + P (A = L|A = a) · (a/2) into

E(B) = (1/2) · (2a) + (1/2) · (a/2) = 5a/4.

So we must show that P (A = S|A = a) = 1/2 and P (A = L|A = a) = 1/2,
which is equivalent to proving that P (A = S|A = a) = P (A = S) and P (A =
L|A = a) = P (A = L), since P (A = S) = 1/2 and P (A = L) = 1/2. Below
is Keith Devlin’s proof that P (A = S|A = a) = P (A = S)—our necessary
condition for rejuvenating our paradoxical expected value calculation—is true
for all a only if the probability distributions governing S and L are uniform on
the interval (0, ∞) [4]. (A proof that P (A = L|A = a) = P (A = L) implies
the same conclusion proceeds in an almost identical fashion and could also
be used [4].)
Bayes’ Theorem tells us

P (A = S|A = a) = P (A = a|A = S) · P (A = S)/P (A = a). (1)

We are able to apply Bayes’ Theorem in this case because the events A = S
and A = L make up a disjoint partition of the sample space of possible ways
that Envelope A could be characterized in our game—as either the envelope
containing the smaller prize or that containing the larger prize. Furthermore,
we can see that
P (A = a|A = S) = P (S = a). (2)
Substituting (2) into (1), we have

P (A = S|A = a) = P (S = a) · P (A = S)/P (A = a). (3)

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From (3), we can see that P (A = S|A = a) = P (A = S)—our necessary
condition for resurrecting the paradox—if and only if P (S = a) = P (A = a).
We will now, therefore, take P (S = a) = P (A = a) to be our new necessary
condition.
We can see that

P (A = a) = P (A = S) · P (S = a) + P (A = L) · P (L = a),

again since A = S and A = L make up a disjoint partition of the sample

space. Since P (L = a) = P (S = a/2) and P (A = S) = P (A = L) = 1/2,
this becomes

P (A = a) = 1/2 · P (S = a) + 1/2 · P (S = a/2). (4)

Thus, in order to satisfy the necessary condition that P (S = a) = P (A = a),

it must be true for every a that P (S = a/2) = P (S = a).
This statement, P (S = a/2) = P (S = a), implies that the probability
distribution of S must be uniform on (0, ∞) [4]. It is impossible, however,
for such a distribution to exist [3]. To see this, let p be a uniform probability
R k+1
distribution on (0, ∞). This means that k p(x)dx = c for all k and for
some constant c. If c = 0, then the area under the curve is 0; if c > 0, then
the area under the curve is infinite. Neither of these, however, satisfies the
R ∞
requirement of proper probability distributions that −∞ p(x)dx = 1.

Recap

We have seen that no conditions will allow us to calculate a correct expected

value such that E(B) > a for all possible prizes, a, in Envelope A, thereby
resolving the paradox. The paradox lay in the tension between two contra-
dictory positions:

1. Since you select an envelope at random, you shouldn’t always have an

expected gain from switching to the other envelope. After all, the game

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 is symmetric. Put another way, why should choosing Envelope A and
then switching to Envelope B give us a better chance of success than
simply choosing B in the first place?

2. Seeing the amount $a in your chosen envelope, A, the expected value

of the prize in the other envelope is calculated to be E(B) = 5a/4,
and therefore you should expect to increase your winnings, on average,
by switching envelopes every time, since the expected value calculation
applies to any a we see.

By scrutinizing the possible probability distributions that could define

the likelihood that a given amount of money is in a given box, we showed
that item 2 is false, thereby resolving the paradox. In the case of a bounded
distribution, it is easy to see that, for some values we might encounter when
we look in Envelope A, there is actually not a 1/2 chance that Envelope
B contains the greater prize; the expected value calculation fails for this
reason, in the bounded case. In the unbounded case, we have seen that there
can exist no proper underlying probability density function governing the
random variable S (and also L) on (0, ∞) in a way that meets the criteria of
the problem. Therefore, it is impossible even to perform a correct expected
value calculation for Envelope B without having density functions that define
the likely contents of B.

Further Puzzles

Our dismantled paradox still invites a number of interesting questions.

A Strategy for Success

We have shown that it is not always advantageous to switch envelopes. But

when does switching envelopes have an expected gain? That is, could we

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develop a strategy that tells us whether or not to switch envelopes, given the
probability distribution function of S (or L) and a, the amount of money we
see when we peek into our initially selected envelope?
This question is answered by Brams and Kilgour [1]. Switching from En-
velope A to B will increase our expected winnings if and only if the expected
value of Envelope B is greater than a:

E(B|A = a) = (2a) · P (A = S|A = a) + (a/2) · P (A = L|A = a) > a, or

2 · P (A = S|A = a) + (1/2) · P (A = L|A = a) > 1 (5)

We know that since A = S and A = L make up a disjoint partition, either
A = S or A = L, and that A = S if and only if A 6= L. Thus,

P (A = S|A = a) = 1 − P (A = L|A = a)1 (6)

Substituting (6) into (5) gives

2 · [1 − P (A = L|A = a)] + (1/2) · P (A = L|A = a) > 1, or

(3/2)P (A = L|A = a) < 1.

Thus, switching is profitable if and only if

P (A = L|A = a) < 2/3,

Brams and Kilgour call this inequality the General Exchange Condi-
tion [1].
From the General Exchange Condition, we can see that if we know the
probability distribution function, p(x), for L, then we can find an a0 which
satisfies the equation Z a0
2/3 = p(x)dx = 1.
0
Thus, if we see a in Envelope A, then we should switch if a < a0 and keep
Envelope A if a > a0 . In the case of a uniform probability distribution for L
supported on (0, 2c/3), a0 will be 4c/9.

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Make It Competitive

We have so far presented the game as a one-player attempt to maximize profit

in a game show. What would happen if we were to pit two rational players
against each other, giving one Envelope A and one Envelope B, and letting
each look at the sum in his own envelope. Would it ever happen that both
players want to trade with each other? If so, then this would appear to be a
somewhat strange situation, though perhaps not paradoxical. A solution to
this question, conceived by Edward Norton and presented in Nalebuff [5], is
given below.
As we have seen, the total possible amount of money in the envelopes
by a constant, which we’ll call 3c. The probability distributions governing S
and L, then, must be bounded by the constants c and 2c, respectively. We
tell our two players, Anne and Bob, the maximum amount of money that
might be in the envelopes and give Envelope A to Anne and Envelope B to
Bob. Let’s consider how Anne might reason:
“I see a in my envelope. I know that for any given trade with Bob, I
could conceivably either halve or double my money. If a is between c and
2c, though, I am sure to have the larger envelope (since the smaller envelope
contains at most c), so I would have no chance of doubling my money by
trading with Bob; I would be guaranteed to halve my winnings (indicated
by the red mapping in Fig. 2). Put another way, c < a ≤ 2c implies that
E(B) = a/2, which is less than a, so switching would be foolish. Therefore,
I won’t switch when a is between c and 2c—but I will offer to trade with
Bob if a ≤ c, in which case I might actually be able to double my money
(indicated by the green mapping in Fig. 2).”

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Figure 2: Anne can’t profit from a trade when c < a ≤ 2c, but it is possible
for her to double her money when a ≤ c.

Bob: “Anne must be thinking that she won’t trade if c < a ≤ 2c. Just
like Anne, I won’t switch if c < b ≤ 2c—but I also won’t trade if c/2 < b ≤ c.
After all, in order for me to profit from a trade when c/2 < b ≤ c, Anne
would have to be willing to trade me between c and 2c—but I know that she
won’t. So I will only switch if b ≤ c/2, in which case Anne might be willing
to make a trade that is actually profitable to me.

Figure 3: Bob anticipates that he will lose money if he trades when c/2 <
b ≤ c.

Anne: “I know what Bob is thinking: he’ll only switch if b ≤ c/2. That’s
pretty smart, but I’m cleverer still. Since the most that Bob will ever trade
away is c/2, I will only have a positive expected value from trading when
a < c/4, in which case a trade to which Bob would acquiesce might double
my money. When a > c/4, I know that I can’t possibly double my money.”

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Figure 4: Anne now thinks that she can only profit from trading when a <
c/4.

Bob: “Hmm... actually, Anne will probably only decide to switch if

a < c/4, considering what I was reasoning before. So I’ll have to limit my
trading to the cases where b < c/8 in order to have a positive expected value
from trading...”

Figure 5: A function can be mapped from A ∪ B to Nn+m when A ∩ B = ∅

We can see that the reasoning continues inductively in this manner until
neither player is ever willing to trade [5].

Conclusion

Paradoxes provide is with an opportunity to grow in our understanding.

Sometimes, we must simply take a closer look at the issue at hand, in order to
see where theory has been misapplied, as is the case with the Two Envelopes
Paradox. Other times, the very mathematical systems within which we are
operating are themselves flawed, as with the famous example of Russell’s

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Paradox illuminating the problems of so-called naive set theory, which was
then replaced with the superior ZermeloFraenkel set theory. In either case,
though, seeking out the resolution of a paradox is an exciting way to bring
our limited understanding closer in line with the pervasive consistency that
underlies mathematics and our physical universe.

References
[1] Steven J. Brams and D. Marc Kilgour, The Box Problem: To Switch or
Not to Switch Mathematics Magazine 68 (1995), 27–34.

[2] Edward B. Burger and Michael, The Heart of Mathematics, 1st ed.
(1999), Key College Publishing: Emeryville, CA

[3] David J. Chalmers, The Two-Envelope Paradox: A Complete Analysis?,

URL = <http://consc.net/papers/envelope.html> .

[4] Keith Devlin, The Two Envelopes Paradox MAA Online, URL =
<http://www.maa.org/devlin/devlin_0708_04.html> .

[5] Barry Nalebuff, Puzzles: The Other Person’s Envelope is Always

Greener Jrnl. of Econ. Perspectives 3 (1989), 171–181.

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