Bidding for Offshore Oil: Toward an Optimal Strategy

The outcome of the drilling of a wildcat well on a lease is almost never known precisely at the time the well is drilled. In fact, even a probability density function of the present values of the possible outcomes is typically not known with certainty. But even wildcat wells are not drilled blindly; before a rational entrepreneur undertakes such a project, he must have enough information to convince him that the possibilities of gain are sufficient to justify the drilling costs. Thus, it can be persuasively argued that, although a potential investor may not be able to specify an objective probability density function, he, in effect, does crudely specify a subjective probability density function in the process of deciding whether or not to undertake the investment