Managing basis risks effectively: balancing the trade-offs from uncertain forecasts for anticipatory action and disaster risk financing

Erica Thompson and Goodwin Gibbins

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: Anticipatory humanitarian action for weather-related hazards is underpinned by weather and climate information, which is subject to many kinds of uncertainty. This paper is a conceptual exploration of the use of uncertain information in anticipatory action and anticipatory disaster risk financing, grounded in detailed survey and interview data gathered from a cross-section of expert practitioners. We identify three primary trade-offs in system design for anticipatory action: (i) confidence with lead time, (ii) accuracy with simplicity, and (iii) adaptability with consistency. Design of anticipatory action and anticipatory financing systems require difficult choices about balancing these factors to maximise value and gain the trust of all participants. Acting on uncertain forecasts also exposes the stakeholders to basis risk: the mismatch between intended and actual outcomes. We distinguish two types of basis risk which arise respectively from the quantifiable uncertainty in a forecast (Type I) and from the possible model error of a forecasting system (Type II). We discuss strategies for quantifying, reducing, and mitigating the effects of the two types of basis risk, noting that financial stakeholders have different priorities and perspectives from operational stakeholders with regard to the three trade-offs listed above. On the technical side, managing basis risk relies on robust and appropriate forecast evaluation procedures chosen with humanitarian outcomes as objectives. This is necessary but not sufficient for the development of trust in a system, which also requires transparency, communication, codesign, reliability, local input, and accountable processes.

Keywords: basis risk; anticipatory action; disaster risk financing; decision-making under uncertainty (search for similar items in EconPapers)
JEL-codes: D81 G23 (search for similar items in EconPapers)
Pages: 39 pages
Date: 2026-07
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