The economic value of weather forecasts for decision‐making problems in the profit/loss situation

This article presents a method to estimate the economic value of forecasts for profit‐oriented enterprise decision‐making problems related to the levels of preparations for goods or services. The sales of goods or services in the study are supposed to be influenced and predicted by meteorological variables. Value is calculated in terms of monetary profit (or benefit) returned from the user's decision under the specific payoff structure, which is represented by a profit/loss ratio model. The decision is determined as a function of the user's subjective reliability of forecasts and forecast probability. The resulting value score (VS) curve shows the scaled economic values relative to the value of a perfect forecast, specified by a function of the profit/loss ratios for different decision makers. The proposed evaluation method, based on the profit/loss ratio model and the VS, is illustrated using hypothetical sets of forecasts, and later verified by applying site‐specific probability and deterministic forecasts, each of which is generated from the Korea and China Meteorological Administrations (KMA and CMA). The application results show that decision makers with high subjective reliability of forecasts can receive great benefits from a given forecast, and there are ranges of profit/loss ratios in which each of the forecast sources used for the evaluation is preferred. Copyright © 2007 Royal Meteorological Society