A False Sense of Security: The Impact of Forecast Uncertainty on Hurricane Damages

Can forecasts of natural disasters alter their destructiveness? Poor forecasts increase damages when individuals do not mitigate risks based on the false belief that they will be unaffected. We test this hypothesis by examining the impact of 12-hour-ahead forecasts on hurricane damages and find that larger errors in the storm's predicted landfall location lead to higher damages. The cumulative reduction in damages from forecast improvements since 1970 is about $82 billion. This exceeds the U.S. government’s spending on these forecasts and private willingness to pay for them. The benefits from forecast improvements are underestimated and individual adaptation decisions matter.