Value of climate forecasts in simple decision-making process

The value of climate forecasts in the decision process can be evaluated using a simple model based on the ratio of cost of mitigating against an adverse condition that is forecast and the loss experienced when the adverse condition occurs and no mitigating action was taken. Cost-loss models are used by a number of groups to argue the value of forecasts given the skill as well as the frequency of the adverse condition. It is vital to recognize the limitations of this simple model, however, as it depends on the perfect application of the decision model over a relatively large number of cases that often exceeds the potential number that can be applied with seasonal climate forecasts. Climate forecast users are often not applying decision rules in several hundred cases or even several dozen, but sometimes only once per year (i.e. a winter season temperature forecast) in one location, or at most a few locations, for a limited amount of time, such as over the last decade. Thus, this study will investigate the risk of loss, even when cost/loss models predict gain, for limited numbers of decisions based on the forecasts given realistic skill levels and adverse condition frequencies.

This study will evaluate several examples of the value and utility of climate forecasts in strong ENSO cases and cases excluding strong ENSOs compared to other realistic iterations of forecasts and decisions to provide a perspective on the skill and frequency required to utilize climate forecasts effectively in a decision process. In addition, because the decision process involves human – often individual – elements, the impact of human behavior will be investigated; for example, the study will evaluate the impact on overall value when a decision-maker stops applying the decision model for a period of time, such as after several consecutive missed forecasts.

It is critical for potential users of climate forecasts to understand the limitations in expected value, especially when applied under less than ideal conditions. Even applying climate forecasts consistently results in only modest value given realistic skill of those forecasts, although forecasts of opportunity provide greater return on investment to a user who has been educated to recognize the opportunities.