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Cost-Loss Decision Models with Risk Aversion

Cerdá Tena, Emilio and Quiroga Gómez, Sonia (2008) Cost-Loss Decision Models with Risk Aversion. [ Working Papers; nº WP01-0, ]

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Abstract

Es generalmente aceptado que determinados fenómenos metereológicos extremos acontecidos
durante las pasadas décadas están conectados con el cambio climático. Algunos de
estos hechos, como sequías o heladas, afectan a la agricultura haciendo obligada la gestión
del riesgo. El objetivo de este trabajo es analizar las decisiones de los agricultores respecto
a la gestión del riesgo, tomando en cuenta la información climática y metereológica. El trabajo
considera una situación en la que el agricultor, en su gestión de la producción agraria,
tiene tecnología disponible para proteger la cosecha de los efectos del tiempo meteorológico.
Este enfoque ha sido usado por Murphy et al. (1985), Katz and Murphy (1990) y otros en
el caso de que los agricultores maximicen los beneficios esperados. No obstante, en esta
ocasión, el modelo introduce un análisis de la actitud hacia al riesgo, de modo que se pueda
evaluar cómo la decisión óptima es afectada por el coeficiente de aversión absoluta al riesgo
de Arrow-Pratt; y se pueda al tiempo computar el valor económico de la información en
semejante contexto.
Abstract
Extreme meteorological events have increased over the last decades and it is widely accepted
that it is due to climate change. Some of the extremes, like drought or frost episodes
largely affect agricultural outputs and risk management becomes crucial. The goal of this
work it is to analyze farmers’ decisions about risk management, taking into account climatological
and meteorological information.
We consider a situation in which the farmer, as part of crop management, has available a
technology to protect the harvest from weather effects. This approach has been used by
Murphy et al. (1985), Katz and Murphy (1990) and others in the case that the farmer maximizes
the expected returns. Nevertheless, in our model we introduce the attitude towards
risk, so we can evaluate how the optimal decision is affected by the absolute risk aversion
coefficient of Arrow-Pratt, and compute the economic value of the information in this context.


Item Type:Working Paper or Technical Report
Additional Information:

Classification JEL : C6 and Q1

Uncontrolled Keywords:Information value, Cost-loss ratio, Decision models, Risk aversion
Subjects:Social sciences > Economics > Economic planning
Series Name:Working Papers
Volume:
Number:WP01-0
ID Code:9920
References:

Katz, R.W., Murphy, A.H. (1997), “Forecast value: prototype decision –making models”, in Richard W. Katz, Allan H. Murphy (eds.), Economic Value of Weather and Climate Forecasts, Cambridge University Press, Cambridge, pp. 183-217.

Katz, R.W. (1993), “Dynamic cost-loss ratio decision making model with an autocorrelated climate variable”, Journal of Climate, 5, pp. 151-160.

Katz, R.W., Murphy, A.H. (1990), “Quality/value relationship for imperfect weather forecasts in a prototype multistage decision-making model”, Journal of Forecasting, 9, pp. 75-86.

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McNew, K.P., Mapp, H.P. (1990), “Sources and Uses of Weather Information by Oklahoma Farmers and Ranchers”, Oklahoma Current Farm Economics, 63(2), pp. 15-30.

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Murphy, A. H., Katz, R.W., Winkler, R.L., Hsu, W. (1985), “Repetitive decision making and the value of forecasts in the cost-loss ratio situation: a dynamic model”, Monthly Weather Review, 113, pp. 801- 813.

Thompson, J. C., Brier, G. W. (1955), “The economic utility of weather forecasts”, Monthly Weather Review, 83, pp. 249-254.

Thompson, J. C. (1952), “On the operational deficiencies in categorical weather forecasts”, Bulletin of the American Meteorological Society, 33, pp. 223-226.

Thompson, J. C. (1962), “Economic gains from scientific advances and operational improvements in meteo-rological prediction”, Journal of Applied Meteorology, 1, pp. 13-17.

Wilks, D.S. (1997), “Forecast value: prescriptive decision studies”, in Richard W. Katz, Allan H. Murphy (eds.), Economic Value of Weather and Climate Forecasts, Cambridge University Press, Cambridge, pp. 109-145.

Winkler, R.L., Murphy, A.H. (1985), “Decision analysis”, in A.H. Murphy, R.W. Katz (eds.), Probability, Statistics and Decision Making in the Atmospheric Sciences, Westview Press, Boulder, Co, pp. 493- 524.

Winkler, R.L., Murphy, A.H., Katz, R.W. (1983), “The value of climate information: a decision-analytic approach”, Journal of Climatology, 3, pp. 187-197.

Deposited On:25 Jan 2010 12:10
Last Modified:06 Feb 2014 08:34

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