Decision Making and the Value of Forecasts in a Generalized Model of the Cost-Loss Ratio Situation

Abstract

Abstract Meteorologists have devoted considerable attention to studies of the use and value of forecasts in a simple two-action, two-event decision-making problem generally referred to as the cost-loss ratio situation, An N-action, N-event generalization of the standard cost-loss ratio situation is described here, and the expected value of different types of forecasts in this situation is investigated. Specifically, expressions are developed for the expected expenses associated with the use of climatological, imperfect, and perfect information, and these expressions are employed to derive formulas for the expected value of imperfect and perfect forecasts. The three-action, three-event situation is used to illustrate the generalized model and the value-information results, by considering examples based on specific numerical values of the relevant parameters. Some possible extensions of this model are briefly discussed.