What determines perceived value of seasonal climate forecasts? A theoretical analysis

Seasonal forecasts have potential value as tools for the management of risks due to inter-annual climate variability and iterative adaptation to climate change. Despite their potential, forecasts are not widely used, in part due to poor performance and lack of relevance to specific users’ decision problems, and in part due to a variety of economic and behavioural factors. In this paper a theoretical model of perceived forecast value is proposed and applied to a stylized portfolio-type decision problem with wide applicability to actual forecast users, with a view to obtaining a more complete picture of the determinants of perceived value. The effects of user wealth, risk aversion, and perceived forecast trustworthiness, and presentational parameters, such as the position of forecast parameter categories, and the size of probability categories, on perceived value is investigated. Analysis of the model provides several strong qualitative predictions of how perceived forecast value depends on these factors. These predictions may be used to generate empirical hypotheses which offer the chance of evaluating the model's assumptions, and suggest several means of improving understanding of perceived value based on qualitative features of the results.

Research highlights▶ A comprehensive economic model of perceived forecast value is developed. ▶ Dependence on wealth, risk aversion, forecast accuracy, presentation is analysed. ▶ Model makes strong testable predictions of dependencies of perceived value. ▶ Suggests tests of utility of economic assumptions for understanding forecast value.