Consequently newendorp 1996 believes emv should be

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Unformatted text preview: e will do better in the long run than another decision-maker would do by using any other strategy for selecting decision alternatives under conditions of risk and uncertainty. Consequently, Newendorp (1996) believes EMV should be seen as a strategy, or philosophy, for consistent 80 decision-making rather than an absolute measure of value. Furthermore, the EMV strategy can only be applied to advantage if used consistently from day to day: “The decision-maker cannot use expected value today, some other criterion tomorrow, and yet a third criterion on the third day.” (Newendorp, 1996 p67) Whilst some decision-makers have rejected EMV since they believe it is difficult, if not impossible, to assign the probabilities to the variables used in expected value computations (Newendorp, 1996 p93), the concept has been gaining increasing acceptance in investment decision-making in the upstream as the business environment has become more complex as outlined in Chapter 3 (Schuyler, 1997; Section 6.1 of Chapter 6). Although each drilling decision is essentially unique, a decision-maker may, over time, make a large number of investment decisions that involve similar monetary sums so that the returns will still be maximised by the consistent application of this criterion. This has led some to argue that the EMV concept is perhaps particularly applicable to large organisations since they usually have the resources to sustain losses on projects that represent only a small part of their operations (Goodwin and Wright, 1991 p65). This may explain why some small exploration companies have rejected using EMV (Newendorp, 1996; Section 6.2 of Chapter 6). However, it is arguable that the smaller company ought to be even more aware of risk and uncertainty because of their smaller asset position and the possibility of “gambler’s ruin” from bad decision-making. Hence, the more likely the rationale for the failure of some small companies to use EMV, is that they lack the resources to conduct the necessary computations (Section 6.3 of Chapter 6). The easiest way to illustrate how to calculate EMV is to use a decision tree. A decision tree is a tool that encourages the decision-maker to consider the entire sequential course of action, before the initial decision (Newendorp, 1996). It is accepted, almost universally, that decision trees provide decision-makers with a useful tool with which to gain an understanding of the structure of the problems that confront them. Keeney (1980) writes: “Often the complex problems are so involved that their structure is not well understood. A simple decision tree emphasising the problem structure which illustrates the main alternatives, uncertainties, and consequences, can usually 81 be drawn up in a day. Not only does this often help in defining the problem, but it promotes client and colleague confidence that perhaps decision analysis can help. It has often been my experience that sketching out a simple decision tree with a client in an hou...
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This document was uploaded on 03/30/2014.

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