Considering Serious Hazards in Forest Management Decision-Making

Abstract

A forest enterprise manager runs risks, when deciding about harvesting strategies. The postponement of the harvest of a stand may yield, with a specifreprohability, a higher profit. However, as a consequence of storm damage, financial losses may occur. The risk of storm damage varies between different stands, similar to the price risk between shares. In this study, the problem of stand selection for final cuts is compared with the problem of optimising a portfolio. Investors that consider only the expected net present value in their investment selection are regarded as risk neutral. Empirical studies show that investors who also consider the range of the profit dispersion are usually risk averse. As a subjective decision criterion from the field of portfolio selection, the tern “expected utility” is used. The expected utility results from reduction of the expected value subject to the level of risk (variance) and the risk aversion of the decision maker. When the decision involves more investments, the risk correlation between the different investments is also taken into account. By means of examples, the use of this decision criterion in forest management is shown. One example concerns the selection of harvesting strategies. Considering a number of equally mature stands, a forest manager has to decide which stands to cut either today, or 20 or 40 years later. Waiting yields a higher profit, if no storm damage occurs. In case of a damage, the income is less than the present.stumpage value. In the second example, different probabilities of storm damage are allowed for the stands. The optimal harvesting strategy can be selected using a non-linear optimisation method. Although currently suitable decision support models from the field of Operation Research exist, formal and conscious risk management has not been implemented in German forestry. Finally, the obstacles for the implementation of improved planning tools in forest management are discussed and the future prospects of their application are assessed.