9781118041581

526 Chapter 12 Decision Making under Uncertainty

56.1

.2

.30

$600

–$120

Drill

(a) Basic Decision Tree

.18

$200

.32

$0

(100)

(25)

(70)

(50)

Do not drill

$0 (50)

.2

.30

$600

–$120

.18

$200

.32

$0

1.0

600

.0

–200

Drill

.561

.439

$600

–$200

.7

600

.3

–200

.5

600

.5

–200

.25

600

.75

–200

(b) Reducing the Drill Option to an Equivalent Risk

FIGURE 12.8

A More Complicated

Drilling Prospect

The decision tree in

part (a) summarizes the

risks of drilling. The

wildcatter chooses to

drill because the

expected utility of this

option exceeds the

utility of not drilling.

Part (b) reduces the

drilling decision tree to

an equivalent tree.

expected-utility rule determines the decision in exactlythe same way (albeit

more compactly). We found the expected utility of drilling to be 56.1. Since this

is greater than the utility of not drilling (50), drilling is the better option.

Henceforth we can apply the expected-utility rule with confidence that it prop-

erly evaluates the relative risks of different courses of action.

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