ON THE ECONOMIC VALUE OF ENSEMBLE BASED WEATHER FORECASTS
Zoltan Toth1, Yuejian Zhu1, and Richard Wobus1
National Centers for Environmental Prediction
Submitted to the
Bulletin of American Meteorological Society
May 3, 2000
1General Sciences Corporation (Beltsville, MD) at NCEP
Corresponding author's address: Zoltan Toth, NCEP, Environmental Modeling Center, 5200 Auth Rd., Room 207, Camp Springs, MD 20746
The potential economic benefit associated with the use of an ensemble of forecasts vs. an equivalent or higher resolution control forecast is discussed. A simple decision making model is used where all potential users of weather forecasts are characterized by the ratio between the cost of their action to prevent weather related damages, and the loss that they incur in case they do not protect their operations. It is shown that in cases of appreciable forecast uncertainty the ensemble forecast system can be used by a much wider range of users, and with significantly greater overall potential economic benefits, than a control forecast, even if the latter is run at a higher resolution. It is argued that the added benefits derive from (1) the ensemble's ability to differentiate between high and low predictability cases, and (2) the fact that it provides a full forecast probability distribution, allowing the users to tailor their weather forecast related actions to their particular cost/loss situation.
During the past decade, due to increased computer resources, the development of more realistic atmospheric models, and the recognition of the importance of atmospheric predictability in general, ensemble forecasting became a major component of Numerical Weather Prediction (NWP). NWP centers around the globe (European Center for Medium Range Weather Forecasts, Molteni et al., 1996; the National Centers for Environmental Prediction, Toth and Kalany, 1993; the Canadian Meteorological Center, Houtekamer et al., 1996; the Fleet Numerical Oceanographic and Meteorlogical Center, Rennick et al., 1995; the Japan Meteorological Agency, Kobayashi et al., 1996; and the South African Weather Bureau, Tennant, 1998, personal communication) started to produce operational ensemble forecasts, where the models are integrated a number of times, started from slightly perturbed initial conditions, in addition to generating the traditional "control" forecast, started from the best available atmospheric analysis. Through the ensemble approach one can generate probabilistic forecasts for assessing the case dependent forecast uncertainty related to small errors in the initial conditions and the models used.
When new forecast techniques emerge, some questions naturally arise: Does the new method provide guidance that is of higher quality or more use than existing methods? Is the potential benefit from running a new technique cost effective? Is the new method sufficient with respect to old methods (Ehrendorfer and Murphy, 1988), i. e., is using the old technique redundant, given the new guidance? These are questions that should be addressed with respect to using the relatively new ensemble technique, as compared to relying on the use of a traditional single control forecast.
In earlier studies we presented a detailed analysis of the quality of probabilistic forecasts generated based on the NCEP ensemble forecasting system (Toth and Kalnay, 1997). The performance of the NCEP ensemble forecasts was also compared to that of the ECMWF ensemble prediction system (Zhu et al., 1996), and a single higher resolution MRF control forecast (Toth et al., 1998). These earlier studies give valuable insight into the behavior of the different forecast systems, thus providing feedback to the developers. Nevertheless, the ultimate measure of the utility of weather forecasts is arguably the economic benefit associated with their actual use in the daily decision making process of individuals or different organizations.
Simplistically, users of weather forecasts either do, or do not take action (e. g., introduce protective action to prevent/reduce weather-related loss), depending on whether a particular weather event is forecast or not. Cost-loss analysis of different complexity can be applied to evaluate the economic impact of the use of weather forecasts on the users (Murphy, 1985; Katz and Murphy, 1997). Studies of the economic value of weather forecasts can either be descriptive, assessing the value of forecasts used, often suboptimally, by existing customers; or prescriptive, identifying the potential value of forecasts, assuming they are used in an optimum manner (Stewart, 1997).
In this paper we evaluate the potential economic value associated with the use of an ensemble of forecasts, vs. an equivalent, and a higher resolution control forecast, using a relatively simple cost-loss model discussed previously by Richardson (2000a) and Mylne (1999). The cost-loss analysis approach followed in this study obviously has its limitations. For example, not all values can be expressed in terms of dollar amounts; the loss of life is one such example. Nevertheless the economic analysis used offers a framework that, after some simplifications, can generally be applied in most cases.
2. Cost-loss analysis
A decision maker becomes a user of weather forecasts if he/she alters his/her actions based on forecast information. If, based upon a particular weather forecast, a user takes a preventive action, and the predicted harmful event does not occur (false alarm, FA), the user incurs a cost (C) associated with his/her action (Table 1). In a case where the event is not forecast the user does not take action, and if the event does not occur (correct rejection, CR), there is no cost (N) on the part of the user. If an event is not forecast but occurs (missed event, M), the user is not protected and suffers a loss (L>C). When, following the forecast of a harmful event a user takes protective action and the event occurs (hit, H), the user has to pay the cost of his action (C), plus may still incur some reduced loss, with a total cost called mitigated loss (ML; typically, C<ML<L).
a. Mean expense
If the relative frequency of the four different outcomes in Table 1 (H, FA, CR, and M)
is known and marked by h, fa, cr, and m, one can assess, in a statistical sense, the mean
expense (ME) of a user of a forecast system:
MEfc=hML+mL+faC (+crN). (1)
Furthermore, one can determine the mean expense associated with using climatological information only:
MEcl=min[oL, oML+(1-o)C], (2)
where o is the climatological frequency of the event. Based on the climatological frequency of the event and on the user's associated costs and losses, the user will either always or never take protective action. A decision maker will choose to use a forecast system if his/her mean expense associated with the forecast system will be lower than that associated with using only climatological information.
b. Economic value
The minimum expense for a user, given a perfect forecast system that provides
accurate predictions for the occurence and non-occurence of a particular event, can be
In this ideal situation, the user takes protective action if and only if a harmful event actually occurs. Using Eqs. (1-3) the definition of the relative economic value (V) of a forecast system can be given as
Using a forecast system that is perfect will result in an economic value of 1 (maximum value), while a forecast system associated with the mean expense equal to (larger than) that attainable using climatological information only will have zero (negative) economic value.
Substituting Eqs. (1-3) into Eq. 4 we arrive at
By recognizing that the actual loss which is protected by taking action is L+C-ML (La, see Richardson, 2000a), Eq. 5 can be written as:
In the special case the users, by their protective action, can perfectly shield themselves from the adverse effect of weather, the mitigated loss is equal to the cost of the protective action (ML=C), and La=L.
As shown by, e. g. Mylne (1999), the economic value defined above is related to the Relative Operating Characteristics (ROC, see, e. g., Mason, 1982), a signal detection theory based measure of forecast performance. On an ROC plot the hit rate HR=H/(H+M) is plotted against the false alarm rate FR=FA/(FA+CR) of a forecast system and its overall performance is measured by the ROC-area defined by the points (0,0), (1,1), and the point(s) representing the forecast system (see, eg., Stanski et al., 1989). Note that the economic value of forecasts (V) depends only on two forecast performance parameters (h and m in Eq. 5), which can be also expressed by HR and FR used in the definition of ROC. Not surprisingly the overall economic value of a forecast system and the ROC-area and Brier Skill Score measures (BSS, which is a measure related to ROC-area for systems with forecast probabilities exactly matching observed frequencies, Talagrand et al., 1998) are closely related (Richardson, 2000b). For example, BSS measures the overall economic value associated with a particular forecast system, assuming that when all users are considered, the same amount of property is at stake at each cost-loss ratio value (Murphy, 1966).
Beyond the parameters describing the forecast system, V also depends on o, the climatological frequency of the event, and on C/La, the cost-loss ratio that depends on the particular user of a forecast system. The fact that all users can be characterized in this framework by a single variable, C/La, offers a convenient way to evaluate the potential economic value of any forecast system for all users on a two-dimensional, V vs. C/La or La/C plot.
3. Experimental setup
In the following section we compare the economic value of the MRF T62 and T126 resolution control forecasts to that of a 14-member set of the T62 horizontal resolution NCEP ensemble for the April - June 1999 period. Note that the computational cost of generating either a higher, T126 resolution control forecast, or a 14-member T62 resolution ensemble is an order of magnitude higher than running a T62 resolution control forecast only. In the example below, weather events are defined as the 500 hPa geopotential height at gridpoints over the Northern Hamisphere extratropics being in any of 10 climatologically equally likely bins (Toth et al., 2000).
Deterministic guidance from a single forecast can be unambiguously interpreted by a user. If a particular adverse weather event is forecast, the user can take protective action, and do nothing otherwise. In case of an ensemble of N forecasts, the user has N options. He/she can choose to take action only if all N forecasts predict the adverse weather, act if N-1, N-2, ..., or even if only 1 member predicts the adverse weather. Each of these decision criteria corresponds with a different economic value. Based on their C/La ratio, users can choose the decision criterion that offers the most value to them. In fact, it can be shown that the best decision level p, corresponding to the predicted probability of the weather event, is equal to C/La (Murphy, 1977). The higher the cost of the protective action relative to the potential loss, the more certainty the user requires about the forecast before he/she takes action. One of the potential advantages of using an ensemble forecast system is that it naturally provides a multitude of such decision criteria. Different users can then tailor their use of the forecast information to their particular application, characterized by their cost-loss ratio.
Relative frequency values based on counting how many ensemble members predict a certain event usually provide probabilistic forecasts that are biased in a sense that they do not necessarily match corresponding observed frequency values. This is because of deficiencies in model and ensemble formulation. For example, when half of the ensemble members predict a weather event, that event may, over a long verification period, verify only 40% of the time. Such biases in ensemble-based probabilities are generally consisitent in time and can be easily eliminated (see, e. g., Zhu et al., 1996). The calibrated forecast that would be issued based on the past verification statistics in the above case, where half of the ensemble members predict an event, for example, is 40%. The April - June 1999 ensemble based probabilistic forecasts evaluated in this paper have been calibrated using independent data from February 1999 verification statistics. For each loss-cost ratio shown in Figs. 1-4 the decision criterion for the ensemble is based on the calibrated probability forecasts. In particular, it is assumed that a user will take protective action if the calibrated probability forecast value is greater or equal to the cost-loss ratio (p>C/La). For the extremely high (and low) probablity values where the finite ensemble cannot provide optimum guidance, the best available guidance was used, i. e., the highest (lowest) probability values associated with all (only one) members predicting the weather event. The above decision making algorithm, based on the users' cost-loss ratio and the calibrated probability forecasts, represents an operationally feasible optimum strategy for the use of ensemble guidance.
As noted above, a single control forecast provides a unambiguous signal whether to protect against adverse weather or not. Therefore, unlike in the case of the ensemble forecasts, the users' response cannot be optimized through calibration of probabilistic guidance.
In Fig. 1 we show the economic value of the two control forecasts vs. an ensemble of forecasts at 24-hour lead time, as a function of the La/C ratio, as discussed above. The economic value comparison results indicate that even at this short, 24-hour lead time, for this well predictable variable, most potential users, except those with loss-cost ratios in a relatively narrow band between 2 and 5, can realize more economic value when using the ensemble forecasts. At and beyond 72 hours lead time (Figs. 2-4) virtually all users are better off using the ensemble system than the control forecasts. Furthermore, the range of loss-cost ratios for which the forecasts exhibit value, compared to using climatological information only, is substantially widened, indicating that a much larger group of users can benefit from the ensemble forecasts as compared to the control forecasts. Note that on each of the figures the largest economic benefit is, as expected theoretically (see, e. g., Richardson, 2000a), attained by users whose C/La ratio is approximately equal to o, the climatological frequency of the weather event, which in our case is 0.1. Note also that with increasing lead time the economic value, as compared to using perfect forecasts, just as the forecast information content (see Fig. 8 of Toth et al., 1998), is reduced.
To summarize the results, in Fig. 5 we show the ROC-area scores for the T62 and T126 control, and the T62 ensemble forecast systems, for different lead times. Recall that the ROC-area can be considered as a summary measure of overall economic value of the forecasts (Richardson, 2000b). The exact implicit assumption in the ROC-area calculations about the distribution of value protected by different users with respect to their cost-loss ratio is not known. Unfortunately, little if any information is available on most users' cost-loss ratio either. Nevertheless Fig. 5 can provide an indication for the overall utility of the three forecast systems. Perfect (climatological) forecasts correspond to a value of 0.5 (0) ROC area, while negative values indicate economic loss compared to using climatological guidance.
The ensemble forecast system is found to outperform the control forecasts at all lead times. For example, at day 2 (6) lead time the use of the ensemble forecast system provides close to 70% (130%) more overall economic benefit than the control forecasts; to put it in another way, a 4-day (10-day) ensemble forecast offers as much value as a 2-day (6-day) single control forecast. Similarly, the use of a 6-day ensemble forecast offers 130% more economic value than a 6-day control forecast; and the same level of value can be attained by the use of a 10-day ensemble forecast. These results are in good agreement with Figs. 1-4, and at later lead time with those of Mylne (1999) and Richardson (2000a).
Over the Northern Hemisphere extratropics the T126 resolution version of the NCEP MRF model generally exhibits higher skill scores than, and is considered to be superior to the T62 resolution model version (P. Caplan, 1999, personal communication). Nevertheless, as Fig. 5 indicates, there is only a slight gain in potential economic value from using the increased resolution model. These results are corroborated by Figs. 1-4, where the economic value curves for the two controls run very close to each other at 1-day lead time (Fig. 1), and are practically indistinguishable at 3-day and longer lead times (Figs. 2-4). In comparison, the ensemble forecasts exhibit considerably higher economic value (Figs. 1-4). The economic value added by using an ensemble is 5-10 times more than that resulting from the use of a higher resolution control forecast (Fig. 5). These results indicate that using the same computational resources, potentially much more economic benefit can be gained from generating an ensemble of forecasts than from increasing the horizontal resolution of the control forecast.
One can draw the following conclusion from the above results. At and beyond 3 days lead time, the direct model output from the ensemble forecasts offers more economic value, and for a wider range of users, than that from control forecasts. For a wide range of users this also holds true for shorter lead times. These findings confirm earlier results by ECMWF (Richardson, 2000a) and UK Met. Office (Mylne, 1999) scientists. Using roughly the same resources, the introduction of an ensemble of forecasts can bring 5-10 times more economic gain than an increase in the resolution of the control forecast. Therefore the use of an ensemble forecast system can significantly increase the overall economic benefit weather predictions can deliver to society.
a. Why the ensemble approach is successful
The superior performance of the ensemble forecast system is due to two factors. First, the ensemble can distinguish between forecasts with higher and lower than average uncertainty at the time the forecasts are issued (Toth et al., 2000). As Toth et al. (1998) showed by using ROC, Brier score, Ranked Probability Skill Score, and information content as measures of forecast performance, the ensemble provides important extra information to the users through its case dependent reliability estimates.
The ensemble technique's second advantage is that it generates probabilistic forecasts with a multitude of probability values, as compared to dichotomous probability values provided by a single control forecast1. This again, as Toth et al. (1998) showed by using different probabilistic verification measures, makes a significant difference. Multiple-value probability forecasts can of course be constructed based on a single deterministic forecast, using past verification statistics. Such a system produces statistically postprocessed, bias-free probabilistic forecasts. Nevertheless, this system was still found deficient by Talagrand and Candille (1999, personal communication) when compared to the performance of statistically not postprocessed ensemble forecast systems. The ensemble's superior performance in their comparison, since the control forecast was also expressed in the form of a full probability distribution, can only be due to its ability to do well capturing day-to-day variations in the expected reliability of the forecasts.
There is a third aspect in which the control and ensemble forecasts differ, and that is their overall accuracy, measured, e. g., by the hit rate of the control vs. ensemble mode forecast. At short lead times, the control has an advantage due to its higher resolution (see, e. g., Fig. 3 of Toth et al., 1998), while at longer lead times the ensemble has an advantage, due to its nonlinear error filtering capability (Toth and Kalnay, 1997). While these differences may be significant, comparing Figs. 3 and 7 of Toth et al. (1998) suggests that they play a secondary role compared to the influence of flow dependent full probability distributions, discussed above.
b. Limitations, and possible generalization of results
All the results presented in this study pertain to forecasts of the 500 hPa height over the Northern Hemisphere extratropics, considered as one of the most predictable atmospheric variables. Comparing Figs. 1-4 it is evident that the more uncertainty (at longer lead times) a forecast has, the more value the ensemble approach has compared to using a higher horizontal resolution control only. Even for this highly predictable variable, beyond 3 days lead time the ensemble system appears to be sufficient (Ehrendorfer and Murphy, 1988) for the high resolution control forecast, i. e., the traditionally produced high resolution control forecast has no value for any user when compared to the lower resolution ensemble.
Based on the 500 hPa results presented in this study one could make a case that, because the lower resolution ensemble is sufficient for the high resolution control forecast, and it can be generated at a comparable cost, there is no need for generating a higher resolution control forecast beyond 3 days. Due to a higher level of uncertainty, variables other than the 500 hPa height, related more closely to sensible weather, are expected to benefit more from the ensemble approach. One can hypothesize that in the presence of any forecast uncertainty, ensemble forecasts may have value for some users; and if the forecasts exhibit substantial uncertainty (which is at or beyond 3 days lead time for NH extratropical height forecasts) it is sufficient to run ensemble forecasts only.
Ensemble forecasts for sensible weather elements should preferably be statistically postprocessed to eliminate possible systematic errors or model biases to facilitate their general use in weather forecasting. Statistical postprocessing has also been a critical element in the interpretation of traditional single control forecasts (e. g., Carter et al., 1989). Note that the purpose of statistical postprocessing of the ensemble forecasts is different from that of a single control forecast. MOS, for example, not only attempts to eliminate the bias from the forecasts on which it is applied but also hedges the forecasts (Murphy, 1978) toward climatology (the larger the expected forecast error, the more so). A single control forecast is normally used to provide a best estimate of the future state of the atmopshere, and hedging serves well this purpose. Ensemble forecasting, however, has a different goal, providing a full forecast probability distribution. In this case hedging, that brings all forecasts, intended to represent the inherent forecast uncertainty, closer to climatology is counterproductive.
c. Implications for weather forecasting
The role of forecasters is to provide all relevant information on future weather to the users. The users in turn can take this information, along with other factors, into consideration when making their decisions related to operations that are sensitive to the weather (Pielke, 1999). As the results and discussion above indicate, it is critical that the users have access to multiple-value probabilistic information that capture the large day-to-day variations in the expected reliability of the forecasts. Such information facilitates the use, and increases the potential economic value of weather forecasts. It is not surprising that companies selling weather derivatives3 are among the core users of ensemble forecasts.
A weather forecast is in fact not complete unless it is expressed in the form of full and joint probability distributions. And in the case of appreciable uncertainty, the goal of weather forecasting, including statistical postprocessing, such as MOS and other methods, should not be the provision of a best estimate of the state of the atmosphere but rather of a full probability distribution (Murphy, 1977). Given considerable forecast uncertainty, users with all cost-loss ratios can benefit more from the use of an ensemble of forecasts than from a single, even higher resolution forecast.
As we saw in Figs. 1-4 the range of users who can derive economic benefit from using a traditional control forecast compared to climatology is relatively narrow. It is also clear from the figures that access to ensemble guidance makes weather forecasts useful for a wide range of additional users. Many of these users who could potentially benefit from ensemble forecasts may be unaware of this, because of their possible negative experience with weather guidance that was based on a single control forecast. They may not realize, until they are introduced to probabilistic forecasting, that the relatively low average hit rate of certain weather forecasts is not an obstacle to their usage, given the forecast probabilities show variations from case to case. This may be especially true for users with high or low cost-loss ratios.
Initially, some users may feel uncomfortable with the notion of "probababilities", thinking they need to make decisions and for that they need a "yes or no" forecast. The idea behind the cost-loss analysis discussed above is that if reliable probabilistic forecasts are available, each user can choose, depending on their estimated or known cost-loss ratio, a different criterion (probability level) for making their own "yes-no" decision. After all, weather forecasters are for making weather forecasts, and decision makers are for making decisions (Murphy, 1978). If the forecaster conveys all available information, the weather forecast, for example, will be no longer "yes, it will rain", but rather, "there is an 80% chance of rain". Users with cost-loss ratios 0.8 and below will interpret this forecast as "yes", while those with ratios above 0.8 as "no". We know that each weather forecast has an associated uncertainty, and that this unceratinty can generally be quantified by an ensemble of forecasts; it is in the users' best interest to seek and utilize this information.
d. An example
As an example, let us consider the use of minimum temperature forecasts by two farmers in the same geographical area who grow different crops that are all sensitive to freezing temperature. Let us assume that the cost of protecting their crops is the same but their potential loss differs dramatically due to differences in the vulnerability and value of their crops. The farmer with less to lose (C/La=0.9, high cost-loss ratio) will only spend on protection if the frost is almost a certainty (p=0.9, or higher forecast probabilities), whereas the farmer who can suffer large losses (C/La=0.05) will want to take protective action even if the forecast probability values are low (p=0.05, or higher). Note that in this example the farmers translate the probabilistic weather forecast into their "protect - do not protect", yes-no decision, using very different decision criteria (low vs. high probability values).
If a forecaster provides only his/her best estimate on whether the minimum temperature will be above or below freezing, this forecast will likely be useless for either farmer (cf. Fig. 2). Such a forecast, with an intermediate average hit rate of say 60%, will be useful only for users with intermediate cost-loss ratios. Neither the low, nor the high cost-loss ratio customer can benefit from such a product. Instead, they will use climatological information and the former farmer will always, while the latter never protect his/her crop. To be of any use for them, the forecasts would need to be issued in the form of multiple probability values; and as we saw such guidance can be readily derived from an ensemble of forecasts. Such guidance can lead to substantial savings for the farmer with low (high) cost-loss ratio by identifying cases when he/she can forgo protecting (implement protection).
The authors are indebted to David Richardson of ECMWF, and Ken Mylne of the UK Met. Office who provided advice, and detailed comments on an earlier version of the manuscript. The comments of Roger Pielke of NCAR, Anthony Barnston and Peter Caplan of NCEP, and John Jacobson of GSC were also helpful. We acknowledge the support and encouragement of Stephen Lord, Director of EMC.
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3#. Weather derivatives are insurance policies offered for premiums that depend on expected forecast reliability. The insured receives a payment in case a weather forecast fails.