The DTREE Procedure
| Attitudes Toward Risk |
Assume now that the oil wildcatter is constantly risk averse and has an exponential utility function with a risk tolerance (RT) of $
. The risk tolerance is a measure of the decision maker’s attitude to risk. See the section Evaluation for descriptions of the utility function and risk tolerance.
The new optimal decision based on this utility function can be determined with the following statement:
evaluate / criterion=maxce rt=700000 summary;
The summary, shown in Figure 7.4, indicates that the venture of investing in the oil well is worth $-
to the wildcatter, and he should not drill the well.
Figure 7.4
Summary of the Oil Wildcatter’s Problem with RT = $700,000
| Oil Wildcatter's Problem |
The DTREE Procedure
Optimal Decision Summary
| Order of Stages | |
|---|---|
| Stage | Type |
| Drill | Decision |
| Cost | Chance |
| Oil_Deposit | Chance |
| _ENDST_ | End |
| Decision Parameters | |
|---|---|
| Decision Criterion: | Maximize Certain Equivalent Value (MAXCE) |
| Risk Tolerance: | $700,000 |
| Optimal Decision Yields: | $0 |
| Optimal Decision Policy | ||
|---|---|---|
| Up to Stage Drill | ||
| Alternatives or Outcomes |
Cumulative Reward | Evaluating Value |
| Drill | $-13,580 | |
| Not_Drill | $0* | |