Forecast Improvements and Optimal Adaptation

Vaibhav Anand

No tvwhz_v1, OSF Preprints from Center for Open Science

Abstract: Forecasts play a key role in guiding short-term adaptations--from pre-treating roads before snow to evacuating people before hurricanes. However, it is unclear how improvements in forecast skill should shape optimal adaptation. I develop a theoretical model for forecast-based prevention and provide three key insights. First, better forecasts lead to higher, yet less frequent, adaptation investments. Second, risk preferences matter less as improved forecasts resolve more uncertainty. Third, the average adaptation declines for highly risk-averse decision-makers but may rise for less risk-averse ones. These findings highlight the need to align resource allocation and planning with forecast skill, especially given varying levels of trust in forecasts.

Date: 2025-03-11
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Persistent link: https://EconPapers.repec.org/RePEc:osf:osfxxx:tvwhz_v1

DOI: 10.31219/osf.io/tvwhz_v1

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