Tools › Statistics › Uncertainty and Monte Carlo › Sensitivity Analysis › Example
Hillier and Lieberman Goferbroke: EMV of drilling against the prior probability of oil
| Tool | Sensitivity Analysis |
| Source | Hillier, F. S., and Lieberman, G. J. (2010). Introduction to Operations Research, 9th ed. McGraw-Hill, New York. Section 15.2, Goferbroke Company. |
| Level | Undergraduate |
Problem
Drilling for oil pays 700 (thousand dollars) if oil is found and loses 100 if the hole is dry; selling the land pays 90 for certain. Write the expected monetary value of drilling as a function of the prior probability of oil, evaluate it at the prior of 0.25, and find the probability at which drilling and selling are equally attractive.
Inputs to Enter
- Model EMV = p*700 + (1 − p)*(−100) (loaded by the Goferbroke example); target 90
- p base 0.25, range 0 to 1
Answers
- EMV(drill) at p = 0.25 is 100 (sell 90); EMV −100 at p = 0 and 700 at p = 1
- Break-even prior p = 0.2375 (the same crossover as the Decision Analysis tool's sensitivity routine)
- Elasticity of EMV to p at the base: 800 × 0.25 / 100 = 2
Notes
Choose the Goferbroke example in the selector; the scenario line "Sell instead: p = 0.2375" is loaded with it.