Fiducial cost-benefit analysis research: with an application to weather modification

Environmental intervention is often seen as being high risk and high return. Traditional scientific hypothesis testing provides limited guidance to policy makers unless there is a high level of certainty in the supporting scientific evidence. Traditional cost-benefit analysis under uncertainty has shortcomings when considering high-risk investment, largely due to the choice of how to discount uncertainty outcomes. A corollary is that traditional cost-benefit analysis does not place a value on increased certainty, an important outcome of successful scientific research. A fiducial costbenefit methodology is presented in this paper, which integrates hypothesis testing and traditional cost-benefit analysis. The fiducial approach is one way of objectively placing a value on changes in the level of uncertainty that does not depend on an assumption about a decision maker's attitudes towards variability in returns. This has two important implications. First, there is a level of uncertainty at which we would reject an investment with a positive expected net rate of return on the basis that the uncertainty associated with the outcome is too great. Second, it is possible to value a program of research that reduces the uncertainty about a critical decision parameter. An example based on data from a weather modification experiment conducted in South Australia is presented. The approach is the generalised using more traditional statistical methodology.

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 Record created 2017-04-01, last modified 2017-04-26

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