Payoff Table for Oil Drilling Case

Alternatives
Drill
Do not drill

No Oil
(700,000)
$0

Cost of Survey

P(NoOil)

0.7

P(SomeO)

0.2

P(MuchO)

0.1

State Of nature
Some Oil
$
500,000 $
$0

Much Oil
2,000,000
$0

$100,000

P(Low|NoOil)
P(Medium|NoOil)
P(High|NoOil)

0.91
0.05
0.04 Of the 100 past sites that are drilled and produced no oil, 4 sites ga

P(Low|Some Oil)
P(Medium|Some Oil)
P(High|Some Oil)

0.04
0.94
0.02 Of the 400 past sites that are drilled and produced some oil, 8 sites

P(Low|Much Oil)
P(Medium|Much Oil)
P(High|Much Oil)

0.01
0.03
0.96 Of the 300 past sites that are drilled and produced much oil, 288 s

If the seismic result=low, Drill or Do not drill?

If the seismic result=medium, Drill or Do not drill?
If the seismic result=high, Drill or Do not drill?

d and produced no oil, 4 sites gave high reading

d and produced some oil, 8 sites gave high reading

d and produced much oil, 288 sites gave high reading

No Oil
Some
Much Oil
Drill
No Oil
Some
Drill
Don't Drill

Much Oil
Do not

Survey
No Oil
Low
Some
Medium

Drill
Much Oil
Do not

High
No Oil
Some
Drill
Much Oil
Do not

-$700,000
No Oil
Some

$500,000

Much Oil
$2,000,000
Drill

-$700,000
No Oil
Some

$500,000

Drill
Don't Drill

Much Oil
$0

$2,000,000
Do not
$0

Survey

-$700,000
No Oil
Low
Some
Medium

$500,000

Drill
Much Oil
Do not

$2,000,000
$0

High

-$700,000
No Oil
Some

$500,000

Drill
Much Oil
$2,000,000
Do not
$0

Cost of Survey

$100,000
-$700,000
No Oil
-$190,000

0.7

Some

0.2

Much Oil

0.1

$500,000

$2,000,000
Drill

\\

Don't Drill
$

EPNS Expected Payoff of No Sampling

NO OIL SOME OIL MUCH OIL

PROBABILITY
0.7
0.2
0.1

CONDITIONAL PROBABILITY (ROW|COLUMN)

NO OIL SOME OIL MUCH OIL
LOW
0.91
0.04
0.01
MEDIUM
0.05
0.94
0.03
HIGH
0.04
0.02
0.96
1.00
1.00
1.00
JOIN PROBABILITY
NO OIL SOME OIL MUCH OIL
LOW
0.637
0.008
0.001
MEDIUM
0.035
0.188
0.003
HIGH
0.028
0.004
0.096
0.7
0.2
0.1

CONDITIONAL PROBABILITY (COLUMN|ROW)

NO OIL SOME OIL MUCH OIL
LOW
0.986
0.012
0.002
MEDIUM
0.155
0.832
0.013
HIGH
0.219
0.031
0.750

P(Low

P(Low

0.646
0.226
0.128
1

P(MuchO

1
1
1

P(Low |Much

P(Low Much

= P(Much Oil) . P(Low|Much Oil)

P(Low)

P(MuchOil |Low)

=P(Low MuchOil)/P(Low)

Cost of Survey

$100,000
-$700,000
No Oil

0.7

Some

0.2

Much Oil

0.1

$500,000

$2,000,000
Drill

-$700,000
No Oil

0.986

Some

0.012

Much Oil

0.002

$500,000

Drill
Don't Drill
$0

$2,000,000
Do not
$0

Survey

0.646

-$700,000
No Oil

0.155

Some

0.832

Much Oil

0.013

Low
Medium

$500,000

Drill
0.226
Do not

$2,000,000
$0

High

-$700,000
No Oil

0.219

Some

0.031

Much Oil

0.750

0.128
$500,000

Drill
$2,000,000
Do not
$0

Cost of Survey

$100,000
-$700,000
No Oil
-$190,000

0.7

Some

0.2

Much Oil

0.1

$500,000

$2,000,000
Drill

-$800,000
No Oil

0.986

Some

0.012

Much Oil

0.002

-$780,960

$400,000

Drill
Don't Drill
$0

$1,900,000
Do not
$0

Survey

0.646

-$800,000
No Oil

0.155

Some

0.832

Much Oil

0.013

Low
$234,071
Medium

$400,000

Drill
0.226
Do not

$1,900,000
$0

High

-$800,000
No Oil

0.219

Some

0.031

Much Oil

0.750

0.128
$1,262,500

$400,000

Drill
$1,900,000
Do not
$0

Cost of Survey

$100,000
-$700,000
No Oil
-$190,000

0.7

Some

0.2

Much Oil

0.1

$500,000

$2,000,000
Drill

-$700,000
No Oil

0.986

Some

0.012

Much Oil

0.002

-$680,960

$500,000

Drill
Don't Drill
$0

$2,000,000
Do not
$0

Survey

0.646

-$700,000
No Oil

0.155

Some

0.832

Much Oil

0.013

Low
$334,071
Medium

$500,000

Drill
0.226
Do not

$2,000,000
$0

High

-$700,000
No Oil

0.219

Some

0.031

Much Oil

0.750

0.128
$1,362,500

$500,000

Drill
$2,000,000
Do not
$0

Cost of Survey

$100,000
-$700,000
No Oil
-$190,000

0.7

Some

0.2

Much Oil

0.1

$500,000

$2,000,000
Drill

-$700,000
No Oil

0.986

Some

0.012

Much Oil

0.002

-$680,960

$500,000

Drill
Don't Drill

$0

\\

$0

$2,000,000
Do not
$0

Survey

0.646

-$700,000
No Oil

0.155

Some

0.832

Much Oil

0.013

Low
$334,071
Medium

$334,071
0.226

$500,000

Drill
Do not

//

$2,000,000
$0

High

-$700,000
No Oil

0.219

Some

0.031

Much Oil

0.750

0.128
$1,362,500

$500,000

Drill
$1,362,500

$2,000,000
Do not

//
$0

Cost of Survey

$100,000
-$700,000
No Oil
-$190,000

0.7

Some

0.2

Much Oil

0.1

$500,000

$2,000,000
Drill

-$700,000
No Oil

0.986

Some

0.012

Much Oil

0.002

-$680,960

$500,000

Drill
Don't Drill

$0

\\

$0

$2,000,000
Do not
0.646

$0

Survey

-$700,000
No Oil

0.155

Some

0.832

Much Oil

0.013

Low
$334,071
Medium
$249,900

$334,071
0.226

$500,000

Drill
Do not

//

$2,000,000
$0

High

-$700,000

0.128

No Oil

0.219

Some

0.031

Much Oil

0.750

$1,362,500

$500,000

Drill
$1,362,500

$2,000,000
Do not

//
$0

EPS

Expected Payoff of Sampling

compare to EPNS
EVSI = EPS-EPNS

ENGS
Expected Net Gain of Sampling
ENGS = EVSI-Experiment cost $

249,900

expected gain from conducting survey. Oil company should not pay more than this amount to

149,900

RESULT
ENGS > $0, worth to carry out the seismic experiment
If the experiment gives medium / high reading: the company should drill
if the experiment gives low reading: the company should NOT drill

pay more than this amount to carry out the survey.

(a) Investment 1
Profit
Probability Expected Profit
$50,000
0.7
$35,000
$10,000
0.1
$1,000
-$20,000
0.2
-$4,000
$32,000
(b) Investment 2
Profit
Probability Expected Profit
$40,000
0.7
$28,000
$30,000
0.1
$3,000
-$10,000
0.2
-$2,000
$29,000
(b) No Investment
Profit
Probability Expected Profit
$0
1
$0

(a) Investment 1
Utility
Probability Expected Utility
1.00
0.7
0.70
0.75
0.1
0.08
0.00
0.2
0.00
0.78
(b) Investment 2
Utility
Probability Expected Utility
0.95
0.7
1
0.90
0.1
0
0.40
0.2
0
0.84
(b) No Investment
Utility
Probability Expected Utility
0.60
1
0.60

(d) Utilities
Profit (ORDERED) Utility
-$20,000
0.00 lowest profit give utility 0
-$10,000
0.40
$0
0.60
$10,000
0.75
$20,000
0.83
$30,000
0.90
$40,000
0.95
$50,000
1.00 highest give utility 1

ofit give utility 0