Discussion Papers,
Norwegian School of Economics, Department of Business and Management Science

Abstract: This paper considers a decision problem in the context of the worth of a wind mill project with profitability dependent on the average wind speed. This is partly known and the issue is whether to go on with the project now or, with an additional cost, put up a test mill and observe, say for a year, and then decide. The problem is studied within a Bayesian framework and given a general analytic solution for a specific loss function of linear type, with the normal case as illustration. Explicit formulas are then derived in the case when the wind speed distribution is Weibull with known shape parameter, and the sensitivity with respect to the specification of this parameter is explored. Based on Norwegian wind speed data we then give a justification of the Weibull model. This also provides some insight to parameter stability. Finally, a complete numerical scheme for the Bayesian two-parameter Weibull model is given, illustrated with an implementation of pre-posterior Weibull analysis in R.

Keywords: Weibull distribution; decision analysis; pre-posterior Bayesian analysis

JEL-codes: C00; C10; C13

19 pages, January 27, 2016

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