Up to Two Rerolls
You roll a fair six-sided die. After seeing the result you may cash out and keep it, or discard it and roll again. If you reroll, you see a second value and may again cash out or discard it for one final roll, after which you must cash out whatever value shows. Assuming optimal play, find the fair price of entering this game.
Work it out, then compare with the answer.
SolutionShow the worked solution
Work backwards from the last roll. Let be the expected payoff under optimal play when rolls remain, including the one about to be made. A rational player keeps a value exactly when beats the continuation value. Hence
One roll left. You must accept the result, so
Two rolls left. Keep the second roll if it exceeds , that is, if it is , or . Otherwise reroll. Then
Three rolls left. Keep the first roll if it exceeds , that is, if it is or . Otherwise reroll. Then
The optimal strategy is therefore:
- keep the first roll only if it is or ;
- keep the second roll if it is or more;
- accept the third roll whatever it is.
The fair price equals the expected payoff of this strategy:
Key idea. Each extra roll raises the continuation value (, then ), and that value sets the keep threshold one stage earlier.