Repetitive Decision Making and the Value of Forecasts in the Cost‐Loss Ratio Situation: A Dynamic Model

Abstract

Abstract The purposes of this paper are to describe a dynamic model for repetitive decision‐making in the cost–loss ratio situation and to present some theoretical and numerical results related to the optimal use and economic value of weather forecasts within the framework of the model. This model involves the same actions and events as the standard (i.e., static) cost–loss ratio situation, but the former (unlike the latter) is dynamic in the sense that it possesses characteristics (e.g., decisions, events) that are related over time. We assume that the decision maker wants to choose the sequence of actions over an n‐occasion time period that minimizes the total expected expense. A computational technique known as stochastic dynamic programming is employed to determine this optimal policy and the total expected expense. Three types of weather information are considered in studying the value of forecasts in this context: 1) climatological information; 2) perfect information; and 3) imperfect forecasts. Cli...