A Brief DPL Tutorial

OperatingCost
ProdRate
DevelCost
PSCShare
Using Utilities
80 100 120 140 160 180 200 220
Figure 19
DPL allows for a very simple means of using a utility function to model risk attitudes.
The Strenlar case is a good example of how the risk attitude as modeled by an utility
function can influence the decision making process.
♦ Open the Strenlar1.da file and run the analysis. We get the Policy Tree shown in
Figure 20 that indicates that the optimal alternative for Mr. X is the riskier of
developing the product on his own.
Strenlar_Decision
[3632]
Develop
Lawsuit
[3632]
-200
Technology
Salary [2017.95]
Technology
Cash_Offer [1004.88]
Figure 20
♦ Now suppose Mr. X is risk averse. A good model for this behavior is an
exponential utility function, which can be totally defined by Mr. X risk tolerance,
which we will assume to be 500.
♦ On the pull down menu, go to “Model/Risk Tolerance” and enter the value of 500.
♦ Run the analysis again. We now get a Policy Tree (Figure 21) that clearly
indicates that given that Mr. X is somewhat risk averse, the optimal course of
action in this case is to go with the less risky alternative of accepting a salary in
the firm plus royalties.
21