Implementing the conditional value at risk approach for even-flow forest management planning

Abstract

Deciding on a plan of action for a forest holding involves a significant amount of uncertainty. As forest planning involves the use and extraction of resources, uncertainty lies in both the future development of the forest (biological uncertainty) and the development of the market for forest-based products (economic uncertainty). Additionally, natural hazards can be a source of unexpected losses. In traditional forest management planning, the most common way to deal with uncertainty is to ignore it. Growth models are used that are assumed to be correct, and timber prices are assumed to be held constant. By ignoring the fact that these models provide only one representation of what may happen, the forest owner may get an overly optimistic (or pessimistic) view of the potential value of the forest holding. Through a stochastic programming formulation, these uncertainties can be modelled directly into the optimization formulation, and a management plan can be created that incorporates the risk preferences of the decisionmaker. This is highlighted through an example that maximizes the net present value of the holding while minimizing the conditional value at risk of obtaining a stated even flow of income.