Abstract
The classical Cozzolino formula for risk aversion, which determines the optimum working interest that should be taken in an exploration opportunity, suffers from the disadvantage that the predicted optimum working interest decreases for opportunities which have increasing high gain potential, independently of the success chance, while the predicted risk adjusted value tends towards a constant limit, which is independent of anticipated costs and depends only on the corporate risk tolerance and the success probability. For low gain opportunities the classical risk formula does an adequate job of assessing optimum working interest. Modifications are given to the method which, for low gain opportunities, reduce to the classical risk adjusted behaviors but which, for high gain opportunities, provides a predicted optimum working interest which increases with increasing gain.
A practical procedure is provided for using these modifications in a simple manner to differentiate between high gain (good-risk) opportunities versus low gain (bad-risk) opportunities. Numerical illustrations indicate graphically the changes in risk aversion brought about by the required modifications.
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