Valuing predictability

Produced as part of the Managing climate risks and uncertainties and strengthening climate services CCCEP research programme theme

How important is it to be able to predict the distant future?

The authors of this paper study this question in a model of an agent who operates in a non-stationary stochastic environment. Payoffs depend on how well adapted activities are to current conditions, and activities may be adjusted to account for anticipated environmental changes, at a cost.

The authors compute the value of prediction systems, which produce forecasts of the future with a given profile of accuracy as a function of lead time in every period. This allows them to quantify the importance of predictive accuracy at each lead time. Even if adjustment costs, discount factors and long-run uncertainty are large, short-run predictability is often more important than long-run predictability.

‘If you have to forecast, forecast often.’ Edgar R. Fiedler, The Three Rs of Economic Forecasting: Irrational, Irrelevant and Irreverent, 1977