Attitudes towards Risk

The DTREE Procedure

Attitudes towards 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 "Evaluation" section 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 3.4, indicates that the venture of investing in the oil well is worth $-13,580 to the wildcatter, and he should not drill the well.

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*

Figure 3.4: Summary of the Oil Wildcatter's Problem with RT = $700,000

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