Colored Chairs on Beach

Climate vs. Weather: Understanding the Difference

Colored Chairs on Beach

The recent heat wave in Alaska where the temperatures exceeded 90 degrees prompted us to ask what is the probability that on a given summer day, the temperature in Fairbanks, Alaska will exceed 90 degrees? Naturally, this is a very small number, best measured in basis points (hundredths of one percent). As with stock returns, a careful review of the past data gives us an idea of what the future may hold (noting that past performance is no guarantee of future results), and the temperature data for Fairbanks shows only 14 days of 90 degrees or higher in the past 109 years, suggesting a probability of 0.14% (based on the assumption of 90 days of summer). This is about the same probability as flipping heads nine times in a row in a fair coin toss. One very important difference between daily stock returns and temperatures is the tendency of the latter to cluster. Specifically, if we know that today’s high temperature in Fairbanks is 90 degrees, then the probability that tomorrow’s temperature will equal or exceed 90 degrees is much higher than 0.14%. With stocks, today’s return tells you essentially nothing about tomorrow’s return.

A very important concept to understand is that daily temperature (or daily rainfall, humidity, etc.) is a random variable, meaning that its exact value is unpredictable, but we may have an idea of the underlying distribution of possible values, which is essentially a function of the climate. A question we may ask is how many observations of highly improbable events (such as 90 degree days in Fairbanks) do we need before we can be reasonably certain that the underlying distribution (i.e., the climate) has changed? Of course, the answer is not simple. One problem is that we do not know the actual distribution—we only have our finite number of observations (including tree ring and ice core data). We face a similar issue when looking at historical returns data. While we currently have 87 years of observed annual returns of the S&P 500 Index, we cannot say that we know for certain the range of possible returns and their probabilities for the next calendar year. Likewise, based on a similar number of observed years of Alaskan temperatures, it is difficult to say that we know the likelihoods of extreme observations. Nevertheless, when we do observe trends such as a much higher number of hot days in the past decade vs. all the previously measured decades, we do have a basis for saying that a change in the climate either has occurred or is in the process of occurring.

According to a statement carried on NASA’s Website1, 97% of climate scientists agree that climate-warming trends over the past century are very likely due to human activities2. The consequences of continued climate warming include rising sea levels, disrupted ecosystems, and more frequent occurrences of extreme weather such as heat waves and hurricanes3. IFA Sustainable recognizes the importance of mitigating climate change to our collective future. The IFA Sustainable Index Portfolios are constructed to favor companies that earn a high rating from Sustainable Holdings, an organization committed to creating a data-driven methodology to effectively capture the sustainable practices of major corporations. To get started on finding a sustainable portfolio of index funds that is right for you, please take our Risk Capacity Survey.

 

 1http://climate.nasa.gov/scientific-consensus

2W. R. L. Anderegg, “Expert Credibility in Climate Change,” Proceedings of the National Academy of Sciences Vol. 107 No. 27, 12107-12109 (21 June 2010); DOI: 10.1073/pnas.1003187107.

3http://en.wikipedia.org/wiki/Effects_of_global_warming