Diversification of management alternatives is an important, yet neglected issue in forestry decision making under conditions of uncertainty and when the forest owner is risk-averse. This paper presents a model for determining the optimal diversification strategy for clearcut decisions when future timber prices are stochastic. The model allows to divide an even-aged stand into two parts that can be harvested at different ages. The optimal division of the stand and the optimal harvest age for each part are determined by maximizing the expected utility of the net present value of the stand. Numerical results are presented for two mature Scots pine stands with different site qualities. The analysis assumes that timber prices in different years are independent and identically distributed and the value of bare land is constant and known with certainty. The results show that for each stand the optimal diversification strategy is to divide the stand into two parts of equal size and harvest one part a year later than the other. In comparison with the uniform decision (i.e. to harvest the entire stand at the same time), the diversified harvest strategy can significantly reduce the variance of the net present value at the cost of a slight decrease in the expected net present value. Whether it is optimal to diversify the harvest decision for a stand depends on the size of the stand, the fixed harvest cost, discount rate, and site quality. A sensitivity analysis shows that the degree of risk-aversion does not have any significant impact on the optimal harvest decision.
Peichen Gong (Wed,) studied this question.