First off, let's get some definitions straight.
Definition 1: A neutral n on a set S with a binary operation * we define as an element n of S such that for all s belonging to S, (s*n)=s and (n*s)=s.
Definition 2: An inverse i on a set S of an element j of S which has neutral n and binary operation * we define as an element i of S such that (j*i)=n and (i*j)=n. j and i need not come as distinct, texts just use different letters so that they may come as distinct, as they often do.
Now for the operation * on {a, b} described in the original post, we have b as the neutral. We have (a*a)=b also. Thus, by definition 2 element "a" of {a, b} qualifies as its own inverse. So, you have a simple example in the original post.