Transcript Tycoon Oil - University of Arizona

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Tycoon Oil
Team 6
Theresa Kayzar
Zach Pendley
James Rohret
Tycoon Oil
Founded in 1952 in Houston, Texas
Bobby Taylor CEO
Interested in a tract of sea bottom for oil
drilling in Gulf of Mexico
Desires to make profit for retirement
spending
Lease Background
First price sealed bid auction
Bobby hired his friend Geologist George
to give him a signal.
Our signal value is $123 million
Bobby needs help!
Assumptions
The same twenty-four companies in our historical data
will bid on future similar leases, and they will be the
only bidders.
The Geologists employed by each bidding company
are all equally expert and can on average estimate the
correct values of the leases.
Except for their means, the distributions of all the the
signals for a given value are identical.
All of the companies act in their own best interests,
have the same profit margins and the same needs for
business. Thus, all companies will use the same
strategy to determine their bids.
Simulation
Based on our assumptions we know the
errors are normally distributed.
Mean of ZERO
Smaller standard deviation will produce
errors that are close to the mean
p.d.f of the errors
0.1
0.06
Individual
Ring
0.04
0.02
bin
30
24
18
12
6
0
-6
-1
2
-1
8
-2
4
0
-3
0
probability
0.08
Simulation
Created Simulation for 5,000 leases and 4
rings using NORMINV
New Standard Deviation: 4.3754
Ring 1
Ring 2
Ring 3
Ring 4
Auction 1
2.859509544 -4.909807464
3.610601986
0.728245693
Auction 2
-7.853232672 -5.921610501 -5.007332686
4.516105217
Auction 3
-2.924264381
2.089664165 -4.330495907
5.133569302
Auction 4
-1.891828139
9.32151304
0.016310579 -2.096906679
Auction 4997
0.611594465
1.06264986 -14.51558917
1.955523461
Auction 4998
-3.37762783
0.12373954
-0.01073444 -5.584435675
Auction 4999
-1.670135592
2.366769902 -5.659527012
5.540920902
Auction 5000
2.418929928
-2.08383434
6.040316096
-6.82425851
Winner’s Curse
Maximum Error of each auction to determine the
winner’s curse.
Winner’s Curse = 4.515
Average Max Error
4.515254832
To calculate our bid we subtract the winner’s curse
from the ring signal:
107.3 – 4.515 = $102.79
Winner’s Blessing
Lower our bid by the difference between the
highest bid and the second highest
(unnecessary money the winner pays)
Average Winner’s Blessing: $3.195 million
Winner’s
Blessing
3.195098041
Max Winner’s
Blessing
15.41563564
Min Winner’s
Blessing
0.000855572