About this question
Easy · Conditional Expected Value · Quant Trader interview question · probability, expected-value, risk-management
You are playing a game of chance with a 50% probability of winning each round. You start with a $1 bet. If you lose, you double your bet for the next round. You continue doubling until you win. What are the primary reasons this seemingly foolproof Martingale strategy ultimately fails in practice? Example: Martingale Strategy Round 1: Bet \$1, Lose Round 2: Bet \$2, Lose Round 3: Bet \$4, Lose Round 4: Bet \$8, Win Net Profit Calculation: $$ \text{Net Profit} = -\$1 - \$2 - \$4 + \$8 = \$1 $$