Management under Endogenous Risk

The probability of a severe weather event occurring is exogenous to the landowner; that is, landowners are unable to influence this probability through their own actions. However, although these events cannot be prevented, their potential impact can be mitigated through forest management, so the extent of severe weather damages to a particular forest area is partially under the landowner’s control. Recognizing this endogeneity of risk and understanding the factors that influence damage patterns are of key importance to efficient forest management. Although there is substantial variation in the empirical findings on the most important factors influencing weather damages, there are some common management recommendations. Landowners can incorporate expectations of severe weather damages into their decisions regarding site selection, species selection, silvicultural treatments, and planning for damage recovery to decrease expected impacts (Bragg and others 2003, Lohmander and Helles 1987, Olofsson and Blennow 2005, Persson 1975, Zeng and others 2004). Another strategy for the forest industry is to diversify spatially to manage risk across total forest holdings thereby avoiding the loss of a large share of their standing timber to a single weather event.

Moore and Quine (2000) present one example of the ability of forest management to mitigate weather risk. They compare wind risk in Sitka spruce (Picea sitchensis) plantations in Great Britain with that in radiata pine (Pinus radiata) plantations in New Zealand using the FORESTGALES simulation model. They report that the plantations in New Zealand were at greater risk of damage than those in Great Britain because of differences in management even though the New Zealand plantations were subjected to a less severe wind regime. In Great Britain, silvicultural practices have been adopted to reduce density, conduct more careful site preparation, and reduce thinning. This comparison demonstrates the influence of forest management on the risk of weather damage, but it also demonstrates that mitigation options adopted should reflect the level of risk faced. Managers of plantations in New Zealand have been able to focus on maximizing profit under a less constraining wind risk, and plantations in New Zealand are more profitable than those in Great Britain.

Of course, appropriate response depends on the degree of risk. In cases where the exogenous risk of damages is low, incorporation of weather risk into strategy may result in minimal or no change in optimal forest management. In contrast, there may be no feasible strategy for reducing damages when the exogenous risk of damages is high other than simply limiting investments and therefore the expected cost of damages. In the intermediate case, where the exogenous risk of damages is significant but there are cost-effective strategies for mitigation, the incorporation of weather risk into decision making may substantially alter optimal forest management practices (Gardiner and Quine 2000).

This implies that any evaluation comparing weather damages on managed and unmanaged sites will be inaccurate if it does not properly account for selection bias. Selection bias arises because the forest management strategies observed reflect decisions made by forest managers based in part on the perceived vulnerability of their stands to weather-related damages and the perceived effectiveness of potential silvicultural actions in those stands. Thus, the value of managing weather risk could be understated if these actions are selectively being undertaken in stands with high expected damages and the outcomes following a storm are compared with those in areas with low expected damages where managers chose to adopt fewer mitigation options. On the other hand, the effectiveness of damage reduction strategies may be overstated if little or no action to reduce impacts is being taken in certain stands because the expected damages in those locations are so large that there are few feasible mitigation options. Thus, careful and systematic program evaluation is needed to account for endogenous selection and to ensure that the effectiveness of damage mitigation options is being assessed after controlling for selection of mitigation options based on perceived baseline risk (Butry 2006).