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 $700,000. 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 $-13,580 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

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
Cumulative Reward Evaluating Value
Drill   $-13,580
Not_Drill   $0*