The Value of Climatological, Categorical and Probabilistic Forecasts in the Cost-Loss Ratio Situation

Abstract

Abstract This paper is concerned with the value of climatological, categorical, probabilistic and perfect forecasts in the cost-loss ratio situation. Expressions are derived for the expense associated with these different types of forecasts, and measures of value and relative value are formulated in terms of these expressions. Some relationships among these expressions and measures are described, and these relationships are illustrated by examining both hypothetical and real sets of forecasts. It is demonstrated that, if the probabilistic forecasts of concern are (completely) reliable, then the value of these forecasts is greater than the value of climatological and categorical forecasts for all activities or operations (i.e., for all values of the cost‐loss ratio C/L). On the other hand, if the forecasts are unreliable, then the value of climatological and/or categorical forecasts may be greater than the value of probabilistic forecasts for some values of C/L. However, examination of hypothetical and rea...