Curr Forestry Rep (2017) 3:93–106
DOI 10.1007/s40725-017-0054-3
FOREST MANAGEMENT (H VACIK, SECTION EDITOR)
The Role of Economic Diversification in Forest
Ecosystem Management
Thomas Knoke 1 & Katharina Messerer 1 & Carola Paul 1
Published online: 31 March 2017
# Springer International Publishing AG 2017
Abstract
Purpose of Review We give an overview of economic drivers
and consequences of diversification in forest management.
Starting with formal portfolio-theory analyses of the optimal
forest composition, we review other, often-disregarded factors
that influence diversification. A special focus of our review is
the interrelation between economic diversification and
multifunctionality, asking if optimal economic diversification
supports increased levels of multiple ecosystem services as a
positive externality.
Recent Findings Analyses considering economic diversifica-
tion in forest management mainly build on Markowitz’ theory
of portfolio selection, which is essentially a statistical theory.
They emphasize that the economic diversification of forest
composition, regeneration and/or thinning strategies, quality
of timber logs, or age classes can significantly reduce risks.
Further studies assume that risk-averse landowners will pro-
vide benefits for the society as a by-product of their
This article is part of the Topical Collection on Forest Management
Electronic supplementary material The online version of this article
(doi:10.1007/s40725-017-0054-3) contains supplementary material,
which is available to authorized users.
* Thomas Knoke
knoke@tum.de
Katharina Messerer
katharina.messerer@tum.de
Carola Paul
carola.paul@tum.de
1
Institute of Forest Management, TUM School of Life Sciences
Weihenstephan, Department of Ecology and Ecosystem
Management, Technische Universität München,
Hans-Carl-von-Carlowitz-Platz 2, 85354 Freising, Germany
management strategies, because economic diversification is
usually associated with enhanced biodiversity and higher
levels of multiple ecosystem services.
Summary We identify drivers and consequences of eco-
nomic diversification that have been seldom addressed
in previous studies. These include the aim to achieve sub-
sistence, to balance site-dependent marginal economic re-
turn among various stand types, to utilize synergistic ef-
fects between mixed tree species and to achieve averaging
effects over time (time diversification). Another important
factor influencing and influenced by diversification is
multifunctionality, because economic diversification alone
does not necessarily automatically provide a larger range
of uncertain ecosystem services. Consequently, future re-
search could extend classical portfolio approaches to
multi-objective, robust optimization.
Keywords Portfolio analysis . Land use . Marginal economic
return . Time diversification . Ecosystem services .
Multifunctional forestry . Uncertainty
Introduction
The word Bdiversification^ traces back to the Latin noun
Bdiversitas^ (or Bdiversus^), meaning diversity or variety,
and the Latin verb Bfacio^ (or Bfacere^), meaning to create
or to manufacture something. Consequently, the process of
diversification means deliberately creating diversity or variety.
This underlines that diversification forms an active manage-
ment strategy. The consequences of purposefully created di-
versity in forest management, for example, diversity of tree
species, stand types, regeneration and/or thinning strategies,
timber grades and age classes, are partly comparable with
those of biological diversity, which of course is usually not
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man-made. While the diversity established by a forest planner
classically focuses on provisioning services that support an
acceptable and stable economic return, biological diversity is
essential for the provision and stability of a broader range of
essential ecosystem services [1, 2]. For example, when bio-
logical diversity diminishes biomass production may de-
crease, ecosystems may become less resistant to environmen-
tal disturbance and essential ecosystem services, such as soil
nitrogen regulation, water use, plant productivity, and pest and
disease cycles, may become more volatile [1].
While some authors [3, 4] confirm a lack of formal
analyses on how to best manage biological diversity based
on established economic theory, such as the theory of
diversifying financial assets (i.e. portfolio theory), others
state that landowners implicitly consider financial return
and uncertainties when deciding about their portfolio of
land-use options [5]. By choosing a certain allocation of
land to various crops and/or forest management options,
landowners (forest owners) also determine the level of
(agro-) biodiversity in the landscape, at least in part.
Risk-averse landowners (forest owners) diversify their
crop or forest management to obtain natural insurance,
providing higher levels of ecosystem services as a posi-
tive externality to the society compared to risk neutral
persons, who are more likely to opt for monocultures
[6]. This would represent a typical win-win situation, at
least under specific conditions.1 Interestingly, this would
support a kind of wake theory, which some postulated for
forestry already in earlier times: BWake theory suggests
that by using a forest [appropriately2] all other forest
functions, such as protection and recreation, are automat-
ically fulfilled in the wake.^ ([7], p. 14506). However,
studies have rarely investigated on a formal basis whether
or not an economically motivated diversification of forest
management options may actually achieve a close to op-
timal level of other ecosystem services as well.
General economic considerations for diversification
either highlight the reallocation of corporate assets to
expand into new markets (products) or the optimization
of the composition of assets to stabilize economic re-
turn. In a similar direction, existing studies that apply
the economic theory of optimal portfolio selection to
environmental problems focus on efficiently reducing
risks by optimizing the composition of natural assets
(e.g. [8–12]). Finally, diversification into more than
1
Crop diversification is reduced when there are other means available to
protect against return volatility of single crops. For example, if landowners
have access to insurance or obtain off-farm (off-forest) income, they tend to
diversify their crops less.
2
Addition by the authors.
Curr Forestry Rep (2017) 3:93–106
one tree species also creates a higher biological quality
compared to monocultures [13].
However, reducing economic risks through optimized eco-
system composition is not the only driver of diversification in
forest management. Other drivers and consequences of diver-
sification are for example (1) the need to produce multiple
goods in order to satisfy subsistence needs, (2) [14] site vari-
ability, distance to market and other aspects which lead to
declining marginal return [15–17], [18] [19], (3) synergistic
effects among ecosystem components, which could increase
forest stand resistance [20•] or biophysical yield [21] and fi-
nally (4) the aspect of time diversification [22].
The possible multifunction effect on diversification de-
serves special attention. Similar to the first driver of meeting
subsistence needs, forest ecosystems will only be able to de-
liver multiple ecosystem services when they are diversified.
While we mentioned some studies analyzing this hypothesis
in the context of biodiversity, only few studies have investi-
gated this hypothesis for forestry, either mechanistically or
empirically (with [23] being one of the rare exceptions).
This review aims to present the advantages and limitations
of economic diversification approaches for forest manage-
ment. For this purpose, we provide an example of how
established statistical theory on economic diversification
could be expanded to cover the above-mentioned, often-
disregarded drivers of diversification to better suit forest
ecosystem-related decision problems. We will focus on pre-
senting a new approach to move away from a purely economic
perspective on risk reduction towards a purposeful diversifi-
cation based on multiple ecosystem services and their uncer-
tainties. Finally, we will draw some conclusions and outline
important research gaps for future studies in forest science.
Diversification of Economic Assets in the Context
of Forest Management
Diversification plays an important role for structuring eco-
nomic assets. There are many levels of diversification; we will
first describe this hierarchy to clarify the levels and forms of
diversification usually dealt with in forest management.
At the first level of the hierarchy, an investor can decide to
diversify by investing in various financial and real assets (see
Fig. 1). Within the class of real assets, investments in land can
in turn be diversified into a variety of land-use options; this
shows that forest and forest use is often only one part of a
diversified landscape. Our review focuses on the aspects of
forest management enclosed in the green box in Fig. 1. We
will use example studies to illustrate these different aspects of
diversification and highlight their role and importance in for-
est management. However, the review will also include stud-
ies from the field of agricultural management where relevant,
Curr Forestry Rep (2017) 3:93–106
Fig. 1 Possible levels of
diversification for economic
assets and forms of diversification
in forest management (in the box)
because advances from agricultural land-use planning may
well support decision problems in forest management.
A Statistical Theory on Economic Diversification
Markowitz [24] applied statistical rules associated with the
Central Limit Theorem to analyze and optimize the composi-
tional diversity of portfolios of financial assets. Generally, the
arithmetic means calculated from several independent random
variables (which could be returns of various investment op-
tions) will usually follow a normal distribution, regardless of
the distribution of the individual variables. Furthermore, with
an increasing number of variables, the standard deviation of
the resulting arithmetic mean will decrease, if the variables are
independent or negatively correlated (see Fig. 2 for an
illustration using artificial variables). The standard deviation
from the averages of two, three, four … and up to 10 variables
declines from the original ±3 (considering only one variable)
to less than ±1 (averaging 10 variables). When variables de-
viate independently (or are negatively correlated) from their
Fig. 2 Impact of the number of independent averaged variables on the
standard deviation of the resulting mean. All single variables have a mean
of 10, with ±3 as their standard deviation
95
means, their deviations will cancel out in part when we aver-
age several variables. Markowitz [24] considered financial
stocks (investments) as variables and utilized this averaging
and risk reduction effect to analyze the aggregated standard
deviation of present values of portfolios of stocks. He consid-
ered that the returns of the mixed assets could be dependent
(i.e. negatively or positively correlated).
Moreover, Markowitz [24] introduced different weights for
the stocks included in the portfolio (portfolio weights).
Supplementary Eq. 1 describes this approach, which provides
that economic return is additive, while risks may cancel out
[4], if the correlations of economic returns are not too high.
Using allocated land proportions as portfolio weights (see,
e.g. [25–29]), we may now maximize the expected economic
Fig. 3 Risk (standard deviation of the expected economic return) and
economic return of several forest stand types and of portfolios of stand
types (area weighted risks and returns for various combinations of stand
types). For a description of this simulated data see Supplementary Tab. 1
and 2
96 Curr Forestry Rep (2017) 3:93–106

Table 1 Composition of example portfolios located on the efficient frontier (indicated by circles on the dotted line in Fig. 3) and maximum utility
portfolios for different levels of risk aversion (highlighted in grey)
Accepted level Achieved Allocated land proportion per stand type (%) Maximum utility
of risk (standard return for relative risk
Broadleaf type Conifer type Mixed forest type aversion of
deviation of the (monetary
achieved return) units) 1 2 1 2 3 1 2 3 1 2 3 4
19 36 33% 36% 0% 15% 4% 4% 2% 5%
20 65 28% 30% 2% 14% 8% 8% 5% 5%
30 133 15% 16% 7% 12% 16% 17% 10% 7%
40 180 9% 9% 11% 12% 23% 0% 27% 10%
50 220 0% 0% 14% 4% 27% 29% 18% 8%
60 252 0% 0% 20% 0% 33% 0% 40% 6%
70 290 0% 0% 29% 0% 25% 30% 16% 0% *
80 312 0% 0% 36% 0% 23% 29% 12% 0%
90 333 0% 0% 42% 0% 22% 28% 9% 0% *
100 353 0% 0% 48% 0% 20% 27% 5% 0%
110 372 0% 0% 53% 0% 18% 26% 2% 0%
120 391 0% 0% 59% 0% 17% 25% 0% 0%
130 409 0% 0% 64% 0% 14% 22% 0% 0%
140 427 0% 0% 69% 0% 12% 18% 0% 0% *
150 445 0% 0% 75% 0% 10% 15% 0% 0%
160 462 0% 0% 80% 0% 8% 12% 0% 0%
170 480 0% 0% 85% 0% 6% 9% 0% 0%
180 497 0% 0% 90% 0% 4% 6% 0% 0%
199 530 0% 0% 100% 0% 0% 0% 0% 0% *

return of tree species portfolios for various levels of accepted
risk (expressed by the standard deviation of portfolio return) to
support long-term planning in forest management. Based on
simulated example data for several forest stand types de-
scribed in the Supplementary Tables 1 and 2, Fig. 3 shows
the efficient frontier (dotted line), obtained from maximizing
economic return for several pre-defined levels of risk. It is
clear that no individual or combination of stand types exceeds
the level of economic return indicated by the efficient frontier
for a given level of risk. We see that the portfolios forming the
efficient frontier (Table 1) achieve usually a higher economic
return compared with that of the single forest stands. Only
stand type BConifer 1^ is superior in economic return to all
portfolio combinations; however, it has by far the highest
standard deviation, being the most risky option.
Markowitz [30] carried out an extensive review on
so-called mean-variance analyses (Fig. 3 is an example
of such an analysis) and confirmed that carefully
selecting a portfolio from the efficient frontier often
maximizes (or at least approximately maximizes) the
expected utility of decision-makers for a wide range of
concave (risk-averse) utility functions. Utility functions
convert economic return into utility, i.e. the satisfaction
that, for example, a forest owner experiences from re-
ceiving a certain economic return. Risk-aversion will
usually lead to a concave utility function, reflecting that
receiving more economic return does not result in a
linear increase in utility. The rate of increase in utility
decreases with increasing size of the return (declining
marginal utility). Consequently, a portfolio optimization
will maximize the averaged (or expected) utility rather
than directly the economic return. We applied standard
concave utility functions with constant relative risk
aversion of various levels (relative risk aversion
increasing from 1, over 2 and 3 to 4, see
Supplementary Eq. 2 for more detailed explanation) to
derive which portfolios would be desirable for decision-
makers with various degrees of risk-aversion (Table 1).
Concave utility functions mean that great dispersion
(high standard deviation) of the economic return will
reduce utility compared to low dispersion.
Obviously, the optimal choice depends much on a forest
owner’s individual level of risk-aversion. With increasing
risk-aversion, landowners should diversify their forest
Curr Forestry Rep (2017) 3:93–106
composition more intensely. If we assume that an increasing
compositional diversity would also increase biodiversity,
Table 1 supports the aforementioned hypothesis of
Baumgärtner and Quaas [6], about risk-averse landowners
providing higher levels of biodiversity and associated ecosys-
tem services to society. However, the above optimization does
not consider multiple ecosystem services directly.
Several studies have applied this type of analysis to forest
management. For example, Neuner et al. [31] considered a
rather large set of 16 stand types from which to build optimal
portfolios of forest stands. They found that the portfolio
weights of the optimal portfolios varied highly, depending
on the objective function used for maximizing utility. Thus,
such analyses may only result in approximate ranges for the
desirable future proportions of forest stand types. This study
was carried out in cooperation with a large private forest own-
er in Germany and is an important example for a real-world
forestry implementation.
Brunnette et al. [32] built tree species portfolios based on
forest productivity and its variability at the national level for
France. Dragicevic et al. [33] have recently published a similar
study extending the approach by Brunnette et al. [32], for
example by integrating economic scenarios. Their results
show that the portfolio formed by the current, empirical land
allocation to tree species in France lies between portfolios that
aim to optimize productivity and those which aim to optimize
economic return. In an earlier study, Thomson [34] derived an
optimal tree species mixture for the South and Midwest of the
USA. Assuming moderate risk aversion, he derived a compo-
sition of about 56% southern pine, 27% southern ash and 16%
white pine. Similarly, Knoke et al. [35] calculated optimal
mixture of 50–90% Norway spruce and 10–50% European
beech for moderate growing conditions in Bavaria, depending
on the assumed degree of risk aversion of the forest owners.
There are also studies revealing low or no beneficial effects
of diversifying tree species. For example, Hyytiäinen and
Penttinen [36] simulated high correlations between economic
returns from various forest stands in a Finnish case study.
Consequently, they concluded that a greater variety achieved
by planting different species is unlikely to be advantageous.
However, they considered existing mixed stands that mostly
comprised Norway spruce and Scots pine (with some stands
also including a small admixture of birch) and excluded natural
hazards from their analyses. To model the uncertainty of forest
returns, Hyytiäinen and Penttinen [36] used historical time series
on stumpage price development (they also considered fluctua-
tion of market prices for timberland). High price correlation
between Norway spruce and Scots pine is well known. For
example, Beinhofer ([37], p. 925) found a correlation between
saw timber prices for both species of 0.87. For similar reasons,
Matthies et al. [38•] confirmed high return correlations between
the forest management regimes considered, also basing their
study on Finnish data and using a similar methodology to
97
Hyytiäinen and Penttinen [36]. However, it would be problem-
atic to generalize this result of no substantial effect of stand type
diversification, when a broader range of tree species or stand
types are potentially available and natural hazards are important.
Other authors applied the theory of portfolio selection to
investigate the optimal diversification of timber products. For
example, Apiolaza and Alzamora [39] used a modified ver-
sion of the portfolio theory to create portfolios of tree genetic
units (called deployment units). They use the mean absolute
deviation as a risk measure and construct an efficient frontier.
The efficient solutions include trees with optimal genotypes
for timber appearance, trees combining timber appearance and
structural use, and trees optimal for structural use only.
However, the portfolio weights allocated to these three genetic
units within portfolios forming the efficient frontier were
highly and unsystematically variable, which hardly allows
for generalizing the results. Variable portfolio weights are a
known problem, as described by Bertsimas et al. [40], when
the objective functions only use part of the available data.
Another example of product diversification is Reeves and
Haight [41]. They found that producing saw timber on 55%
of the forest area and of pulpwood on 45% of the area reduces
the risk by 80%. Griess et al. [42] obtained a very similar
result for South Africa. Here, the production of saw timber
(of patula pine) on 45% and pulpwood (of rose gum) on 55%
of the forest area proved optimal. Beinhofer [43] carried out
investigations for a Bavarian case study, considering stands
for high-quality timber (pruned), saw timber or pulpwood as
the main log classes (for the case of Norway spruce and Scots
pine). Given optimal rotations and considering calamity risks,
Beinhofer [43] derived 37% of the forest area for stands of
high-quality timber, 46% for saw timber and 16% for pulp-
wood as the optimal composition under strong risk-aversion
(for normal risk-aversion high quality timber and saw timber
comprised 55 and 45% of the forest area respectively).
In summary, studies that use Markowitz’s theory of finan-
cial diversification to optimize stand or tree species composi-
tion or planned timber log classes for forest companies or
larger forest landscapes are still relatively rare. This may have
several reasons, including ignorance of financial issues and/or
formal optimization to support forest planning in some coun-
tries (e.g. [44]), but also the difficulties associated with
obtaining the necessary data. There is no stock market data
on single forest stands, so that all the necessary information
needs to be derived through simulations. The greatest chal-
lenge is that information on all possible covariances for the
considered stand types or options is necessary. General limi-
tations of most studies include the assumption of homoge-
neous site conditions in line with von Thünen [18].
Consequently, future analyses should consider the natural var-
iability of site conditions as well. Moreover, the results of
these portfolio theory approaches depend on many assump-
tions and may change fundamentally when just small changes
98
in input parameters occur [45]. Finally, a fundamental critique
of this optimization approach is that the utility of decision-
makers does not depend on money alone.
Given the limitations of portfolio theory approaches to in-
form forest management decisions, we identified the follow-
ing Bdrivers of diversification^ that are often disregarded in
such analyses.
Other Drivers and Consequences of Diversification
Subsistence as a Management Objective
Particularly in tropical areas, rural populations often depend on
the income or the products of their farm and/or forest for their
livelihood [46, 47]. Similarly, in forestry, the highly diversified
uneven-aged silviculture systems have developed in small-
scale, private forest properties [14]. Land-use diversification
is therefore not only a strategy to reduce risks but also a live-
lihood strategy to provide multiple products that satisfy family
needs [48]. However, as a strategy to reduce dependency of
family livelihood on farm products, farmers will also strive to
diversify income sources by receiving other off-farm income
(for example through off-farm work). Particularly in the con-
text of forest ecosystems, compensation payments for forest
conservation or ecosystem services have evolved as an addi-
tional income source offered by state institutions or non-
governmental organizations. The effect of such payments on
land-use diversification is, however, yet to be investigated.
Insurances and agricultural subsidies (in the form of direct
payments to farmers) have already been shown to reduce in-
come diversification [6, 49], but studies on actual on-farm
diversification (including forest as a land-use option) are miss-
ing. The existing knowledge shows that such payments could
affect compositional and time diversification in forests or
farms. Land-use diversification also depends on further house-
hold characteristics such as farm size, the farmer’s age, gender
and personal beliefs and attitudes towards climate change [50].
In summary, these studies demonstrate that empiric knowl-
edge of drivers of diversification, stemming from individual
characteristics of farmers or forest owners, could well support
the modeling of diversification to derive appropriate land-use
recommendations.
Declining Marginal Return
Risk reduction and the need for multiple products are not the
only drivers of land-use/forest diversification. For example,
declining marginal return will trigger diversification of tree
species or stand types on forestland, when the marginal return
curves of the available land-use alternatives decline at differ-
ent slopes (Fig. 4). Under homogenous site conditions, land-
use diversification occurs at the regional level, for example,
Curr Forestry Rep (2017) 3:93–106
Fig. 4 Schematic of differently decreasing marginal economic return
(return in monetary units and obtained for the last hectare) for four
example tree species in a large, pure forest landscape, where even
forestry is not profitable on around 18% of the land (this schematic may
be extended by agricultural crops). The colored bar indicates the
equilibrium land allocation to the tree species
when transportation costs matter. These costs have an impact
on marginal economic return, classically called Bland rent^.
Von Thünen [18] established his famous theory on land allo-
cation already in the nineteenth century [51]. Based on a
somewhat stylized mechanistic model, he showed that land
allocation to different land-uses would form rings around the
city with the market in its centre. Using an even more aggre-
gated and stylized land-use model at the national level, Knoke
et al. [19] showed how making prices dependent on the total
quantity of a commodity produced, also leads to land-use
diversification under homogenous site conditions. However,
the authors are not aware of forestry studies incorporating
these effects to model or investigate diversification.
Site variability may limit the diversification potential, as
only a small set of tree species will grow profitably on very
poor sites. However, site variability may also support diversi-
fication, because site quality is an important factor that influ-
ences marginal return. For example, the revenues of a crop
will be lower on land less suitable for its growth. When sorting
all available land according to the achievable revenues for
each species in descending order, similar curves as depicted
in Fig. 4 could result. The per hectare revenues from land-use
options would then be endogenous, depending on the alloca-
tion of land to different land-use options. However, in prac-
tice, it is very difficult to obtain such data, because it would
require an experimental setting [52].
Diversified land-use systems may consider these effects to
maximize economic return rather than opting for large-scale
monocultures. Always growing the crop that, compared to
other crops, achieves the highest economic return on a given
piece of homogenous land will be a typical strategy to use the
economies of scope [53]. Economies of scope include lower-
ing average costs or increasing average returns by producing
various types of products, as opposed to economies of scale,
which reduce costs by producing large amounts of one
Curr Forestry Rep (2017) 3:93–106
product. However, strategies capitalizing on economies of
scope may result in higher management costs.
Studies that consider site suitability when analyzing diver-
sification in ecosystem management are rare. However,
Clasen and Knoke [17] demonstrated the strong effects of site
variability on economic return of different mixtures of
Norway spruce and European beech in Bavaria. Messerer
[54] demonstrated that the diversity of equilibrium land-use
portfolios in the Dominican Republic increased from two to
four land-use options (out of 10) when considering heteroge-
neous rather than homogenous site conditions.
In summary, we may say that available studies hardly con-
sider declining marginal return in association with land-use
diversification or forest-related diversification. This would
be an important future field for scientific studies.
Synergistic Effects Among Ecosystem Components
The portfolio theory assumes that economic return is additive,
while risks may cancel out [4]. It thus ignores possible syner-
gistic (or antagonistic) effects among the mixed components,
which may apply to ecological portfolios. For example,
Neuner et al. [20] have shown positive interactions between
tree species regarding forest stand resistance to abiotic and
biotic damage, while Pretzsch and Schütze [21] have demon-
strated synergistic interactions leading to increased biophysi-
cal yield—under certain circumstances. Koellner and Schmitz
[55] distinguish two types of portfolios to consider the poten-
tial for possible interactions among species: statistical portfo-
lios (type I) and ecological portfolios (type II). In type I port-
folios, the mixed species do not interact or the interactions are
negligible. This leads to linear changes in expected return
(return additivity), as demonstrated earlier with Fig. 3 and
Table 1. Koellner and Schmitz [55] mention farm-level crop
diversification as an example of this type of portfolio.
However, if crop or tree species interact because of ecological
interdependencies, the return additivity disappears, which
would represent a type II portfolio.
Within forestry, there are many examples for ecological
interdependencies between stand-level mixed tree species
(see review by Forrester and Bauhus [56]). In a theoretical
study, Knoke and Seifert [57] integrated possible effects of
mixing Norway spruce and European beech on stand volume
growth, timber quality and resistance to hazards. Mixing spe-
cies was assumed to improve stand resistance, which contrib-
uted to a large increase in net present value (NPV) and re-
duced risk. The two other aspects had a smaller impact on risk
and returns; lower timber quality reduced NPV and the impact
of changed volume growth was relatively neutral. Griess and
Knoke [58] applied the same bioeconomic model developed
by Knoke and Seifert [57], but incorporated improved survival
curves for mixed forests [59]. They obtained the highest NPV
for mixed forest stands with very small admixture (7%
99
European beech). However, the advantage of this mixed stand
compared to pure Norway spruce was only +8% and for an
unlimited time horizon the economic return of the mixed for-
est was only slightly higher than for the pure forest.
Nevertheless, the economic risk in the simulated mixed forests
was always significantly smaller than in the pure forest stands.
In a forest stand with 49% Norway spruce and 51% European
beech, the standard deviation of economic return was reduced
by 55%. However, the economic return of this mixed forest
stand was 23% lower.
Roessiger et al. [60] showed that improved stand resistance
allowed for an increased proportion of Norway spruce and, as
a consequence, for higher economic return. A previous study
found that when ignoring improved stand resistance, a propor-
tion of European beech of 58% maximized the worst-case
economic return [61]. In contrast, when improved stand resis-
tance was considered, a proportion of only 20% European
beech maximized the worst-case returns [60].
These results show that considering ecological interactions
between the mixed tree species has potential to increase eco-
nomic returns. Future analyses are desirable to understand
how the impacts of interactions between tree species on stand
growth in mixed forest stands in turn influence economic re-
turn and risk. In addition, future studies could integrate new
insights about changes in stand resistance in a warmer and
drier climate [20] into economic considerations. Preliminary
analyses show (so far) a relatively small impact of climatic
change on the economic performance of forest stands [62], if
only tree survival changes. However, more significant impacts
may arise when integrating the climate change-induced
changes in tree growth [63].
Time Diversification
Time diversification is based on the phenomenon that above-
average and below-average returns will cancel out in the long
run and that long-term investments are, thus, less risky. Time
diversification is important for forest management, because
here the effect of a regular and frequent income, which is
known as consumption spreading and is one element of sus-
tainability, is preferred to receiving one very large income at
one point in time only.
Time diversification can be viewed from different perspec-
tives, as evident when comparing financial and forest science
studies. Financial studies have long debated the consequences
of and conclusions from Btime diversification^ [64]. The ob-
servation that above-average returns tend to compensate for
below-average returns over a long time-horizon [22] has led to
the hypothesis that the length of the investment period should
have an impact on portfolio composition. Long investment
periods would allow investments in more risky assets com-
pared to shorter investment periods. However, several authors
have shown that the portfolio allocation between risky and
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risk-free assets is independent from the length of time consid-
ered, at least under certain conditions [65].
Some forest science studies use a different perspective of
time diversification. Here, the timing of forest operations is
important, i.e. when to generate net revenues and at which
amount? Alternatives are (1) a concentration of net revenue
flows to largely one period (clearcut) or, (2) a distribution of
net revenues over many periods (several thinnings, extended
regeneration periods or even continuous periodical selection
harvests in Plenter forests). Option 2 makes use of the com-
pensation effects known under time diversification in the fi-
nancial sector [35] and is effective in reducing financial risks
at the stand level. Continuous net revenues on the enterprise
level will also reduce financial risks compared to discontinu-
ous net revenues, where peaks in some periods and hardly any
net revenues in others prevail (intermitted management).
Traditionally, forest planners try to achieve balanced portfoli-
os of age-classes (fully regulated forests) to provide timber
and revenue flows more continuously. Economic studies sup-
port this practice. Tahvonen and Kallio ([66], p. 557) confirm:
BIncluding risk aversion completely changes the harvesting
policy in the sense that, if the forest initially consists of just
one age class, it is optimal to smooth the age class structure
and have more frequent cuttings from younger age classes.^
Similarly, Härtl et al. [67] and Hahn et al. [68] have shown that
risk-sensitive objective functions applied to forest manage-
ment planning will implicitly smooth age class distribution
and harvest peaks at the company level that would otherwise
occur if risks are not integrated into forest planning.
Time diversification applies also to stand level optimiza-
tion, as shown by Roessiger et al. [60]. They extended the
static portfolio optimization of the tree species composition
by considering various periods. As a result, Roessiger et al.
optimized the tree species composition and the silvicultural
regeneration strategy simultaneously, based on a risk-
sensitive objective function, and obtained long regeneration
periods, spreading regeneration harvests over 60 years. A pos-
sible, but so far disregarded, consequence of this shift towards
longer regeneration periods is that the resulting uneven-aged
forest stands may improve forest-level resistance to natural
hazards (e.g. [69]).
Stand level considerations about actively integrating uncer-
tainty into decision-making may work against time diversifi-
cation. For example, some studies considered high variation in
economic return as a positive aspect, because an appropriately
adapted management could increase the NPV of investments
with high uncertainty [70]. For the case of forestry, Brazee and
Mendelsohn [71] have shown that appropriately handling the
variation of timber prices may increase the NPV of forest
management. Using these advantages of uncertainty may lead
to discontinuous harvesting and appears to conflict with a
consistent time diversification strategy. However, one may
combine time diversification with price-adapted harvesting
Curr Forestry Rep (2017) 3:93–106
in selection forests by allowing variation in harvest cycles.
Jacobsen and Helles [72] have shown that flexible harvest
cycles may increase the land expectation value of uneven-
aged management by 11%. Moreover, time diversification is
a strategy to keep decisions open, which maintains flexibility
to adjust decisions, when uncertainty reduces [73]. Whether or
not such economic value of increased flexibility (here the
ability to harvest only part of and not the total standing timber)
will be realized depends much on the expectations of forest
managers. For example, Schou et al. [74] have shown that
forest managers tend to make sub-optimal decisions based
on their incomplete ex-ante knowledge, if they expect that
uncertainty about climate change will still prevail for a long
period.
Moreover, the entry costs associated with frequent silvicul-
tural operations are important for the NPV under time-
diversified management. If interventions are too frequent,
the economic return may be quite low. For example, Schou
et al. [75] have shown that transformation harvests carried out
every 2 years decreased the vulnerability of forest stands to
wind throw, but also decreased profitability. Consequently, the
harvest cycles to obtain time diversification should not be too
short.
We may conclude that forest operations should lead to a
more or less continuous flow of benefits to maximize utility of
risk-averse forest managers. This supports spreading silvicul-
tural operations over multiple periods, which may also lead to
uneven-aged stand structures (depending on the size of the
forest considered). Additionally, time diversification will also
lead to increased flexibility for future decision-making as well
as help to reduce risk.
Considering the Multifunction Effect and Its
Consequences
Diversity within and among forest ecosystems or farms is an
important precondition for achieving multiple ecosystem
functions and services. For example, in a plot level study,
Soliveres et al. [76] have recently shown that ecosystem
multifunctionality of grassland ecosystems needs biodiversity
at multiple trophic levels. Other landscape level empirical
studies suggest that disturbance will affect ecosystem process-
es and functions less adversely, when landscapes have high
compositional diversity [77, 78]. Diversifying crop composi-
tion on farms [50, 79] and tree species in forest ecosystems
[23] may also improve the levels of multiple ecosystem
services.
However, studies exploring the management and landscape
level optimization of multiple ecosystem services are rare. An
attempt to achieve this using a mechanistic model is a recent
study by Knoke et al. [80•]. This study investigated how land-
use planners should design new landscapes on abandoned
Curr Forestry Rep (2017) 3:93–106
tropical lands to achieve multiple ecosystem services and
buffer against uncertainty. The results showed that a landscape
mosaic with high landscape compositional diversity is optimal
to achieve both improved levels of multiple ecosystem ser-
vices and buffer against perturbations. This means that multi-
ple ecosystem services require a diversified landscape compo-
sition. However, as far as we know, similar studies do not exist
for forest enterprises/landscapes.
Methodologically, Knoke et al. [80•] combined existing
multi-objective programming approaches, such as those sug-
gested by Chang et al. [81] or Estrella et al. [82•], with the
consideration of uncertainty spaces. The uncertainty approach
follows general suggestions for a basic form of robust optimi-
zation described by Ben-Tal et al. [83] and suggestions made
by Knoke et al. [84] for non-stochastic optimization of agri-
cultural land-use portfolios. Uncertainty enters the optimiza-
tion through (variable) uncertainty spaces with given corner
points; these are formed by combining the minimal and max-
imal levels of all considered ecosystem services. We assume
that the boxes/spaces formed by the mentioned corner points
include all possible values of ecosystem services so that solu-
tions for all corner points guarantee a minimum level of
achievement for all combinations included in the uncertainty
spaces. As there are many combination possibilities, depend-
ing on the number of options (2 to the power of the number of
options), one specific combination is considered a scenario.
For an optimized portfolio, a feasible solution for all scenarios
has to be met and accounted for simultaneously. In summary,
the optimization takes place for discrete parameter combina-
tions from the surface of the uncertainty space, while classical
optimization maximizes an expected (stochastic) return, sub-
ject to certain constraints, which limit uncertainty. While non-
stochastic optimization guarantees pre-defined levels of
achievement for all parameter combinations contained in the
uncertainty space, stochastic optimization results in expected
achievements, which are associated with a certain probability
but are not guaranteed.
The resulting optimization approach allocates land propor-
tions to forest stand types in a way that minimizes the greatest
(worst) deviation from the maximum ecosystem service level
achievable by the options considered. For reasons of compa-
rability, the various indicators need to be standardized based
on the achieved ecosystem service levels, for example be-
tween 0 and 100%, as suggested by Koschke et al. [85]. The
optimization approach (Fig. 5) does not allow for compensa-
tions among ecosystem services, requiring high (minimum)
levels for each single indicator. Alternatives would be more
common goal programming approaches that minimize the av-
erage deviations from pre-defined target levels for each eco-
system service (e.g. [86, 87]). Supplementary Eq. 3 provides a
mathematical description of the approach.
We will illustrate possible consequences following from
the multi-objective programming approach considering
101
example indicators to quantify a selection of ecosystem ser-
vices. We adopt simulated example forestry data already used
in Fig. 3 and expand it with data on ecosystem service provi-
sion given in Supplementary Table 1. Economic return, timber
production (total growth performance per year), storage of
carbon in the living forest biomass and the average and max-
imum levels of coarse woody debris are used as indicators to
derive the optimal long-term composition of forest stand types
for a forest enterprise. We will compare the optimization re-
sults for the single service of economic return with that ob-
tained when considering multiple services. For these optimi-
zations, the size of the considered uncertainty spaces depends
on the assumed negative and positive deviations from the
expected indicator levels of the considered ecosystem service.
These sizes are based on the simulated/assumed standard de-
viation of each indicator for the considered ecosystem ser-
vices. Supplementary Fig. 1 displays different sizes of uncer-
tainty spaces with example values of two indicators. The al-
located land proportions (portfolio weights) remain more or
less stable from uncertainty space sizes of 1.5 times the stan-
dard deviation and greater (see Supplementary Fig. 2).
When considering only one objective (economic return) we
reduce the problem to a robust optimization problem under
uncertainty, as described by Knoke et al. [84] for a mainly
agricultural land-use example. This type of optimization
achieves robust solutions and significantly reduces the data
demand and the above-mentioned shortcomings compared to
Markowitz’s classical portfolio theory. Using two times the
standard deviation as the uncertainty of the return coefficients,
a focus on economic return as a single service resulted in a
diversified portfolio of stand types consisting of 61% Conifer
1, 12% Conifer 3, 8% Mixed forest 1, 7% Mixed forest 2, and
11% Mixed forest type 3 (Fig. 6 left).
We obtained this result by minimizing the maximum devi-
ation from the highest achievable economic return according
to Supplementary Eq. 3 among 256 scenarios that cover the
uncertainty of the return level. These scenarios result from the
maxima and minima for the economic return of eight stand
types, forming 28 = 256 possible combinations of return co-
efficien ts. In this w ay, ou r app roac h minimiz es
Bunderperformance^. We standardized all portfolio level eco-
nomic returns to an interval between 0% (minimum economic
return among all options) and 100% (maximum economic
return). The obtained optimized allocation of land proportions
to stand types (for an uncertainty level of two times the stan-
dard deviation of economic returns) guarantees an achieve-
ment level of at least 38% (rounded value), regardless of
which of the 256 combinations of coefficients is considered.
This picture changes substantially when considering timber
production, carbon storage and coarse woody debris in asso-
ciation with economic return, enlarging the number of consid-
ered combinations of coefficients to 1280, resulting from five
indicators times 256 uncertainty scenarios per indicator (Fig. 6
102
Fig. 5 The graph, adopted with alterations from Knoke et al. [80•],
shows the min-max normalized achievement levels (y-axis) for two hy-
pothetical indicators (x-axis) (for example carbon sequestration and eco-
nomic return), used to optimize land allocation to different land-use (or
forestry) options. The original dataset and example referred to the reha-
bilitation of abandoned tropical lands through different agricultural and
forestry options [80•]. The indicators have been scaled from zero (least
desirable indicator value) to 100% (most desirable value). Each point
represents the indicator achievement level for a range of uncertainty sce-
narios considered for each indicator. The figure shows hypothetical re-
sults for two allocation scenarios for area proportions: white circles rep-
resent the indicator values under the scenario that all of the land is
right). Although these are only example indicators, we see
clearly that the degree of diversification of forest stand types
increases significantly when high indicator levels (where the
minimum levels are improved) for multiple ecosystem ser-
vices is an objective (multifunction effect), compared to striv-
ing only for economic return. Here, all stand types are mem-
bers of the multiple ecosystem service portfolio. The stand
type Conifer 1 still has the highest share, but this is reduced
from 61 to 30%.
Obviously, we do not obtain a perfect win-win situation
when only optimizing economic return under uncertainty. To
achieve higher levels of multiple ecosystem services, a more
diverse composition of the portfolio of stand types is needed.
Fig. 6 Composition of forest stand types to achieve high minimum levels
of economic return under uncertainty (left) compared to the composition
that improves minimum levels of multiple ecosystem services (right),
given an uncertainty level of 2 times the standard deviation. This
Curr Forestry Rep (2017) 3:93–106
allocated to one single land-use or forestry option. For indicator B, this
single option would give the least desirable indicator value of zero for
some of the uncertainty scenarios. Consequently, the maximum distance
to the most desirable value is 100%. Grey diamonds represent the indi-
cator achievement levels under the Boptimized^ scenario, consisting of a
mixture of various options, which buffers against uncertainty. In this
scenario, land is allocated to several options in a way that minimizes
the maximum distance to the 100% achievement level. Here, indicators
consist of the sum of the indicators recorded for the individual options,
which have been multiplied with the area fraction allocated to the corre-
sponding type of option
The resulting trade-off becomes especially clear when com-
paring the economic return, which decreases from 391 (±126)
€/ha/year when maximizing economic return as the only ob-
jective, to just 217 (±63) €/ha/year for the portfolio aiming to
provide multiple ecosystem services.
This analysis does not challenge the hypothesis that risk-
averse landowners will provide improved levels of ecosystem
services for society as a positive externality, when they diver-
sify their land to cancel out private risks (e.g. [6]). However, it
becomes clear that the Boptimal^ levels of multiple ecosystem
services will not result from economic optimization under
uncertainty alone, as Bwake theory^ would suggest.
Moreover, it is remarkable that the mean annuities will reduce
uncertainty level considers maximum and minimum levels for each eco-
system service that are equal to the expected value ±2 times the standard
deviation of the simulated indicator levels. Percentages correspond to
land proportions allocated to each stand type
Curr Forestry Rep (2017) 3:93–106
by 45% to achieve optimal multifunctionality. The reduced
risk of the multifunctional forest portfolio hardly provides
appropriate compensation for this economic loss. Future re-
search could strive for optimization strategies that reduce the
high financial costs of multifunctionality.
Conclusions
Our results show several strengths of economic diversification
in forest management. For example, diversification (in time
and space) can reduce economic risks and (under synergistic
effects and through efficient land allocation on heterogeneous
sites) increase economic return and subsistence. Moreover,
our example calculation shows that with improved, robust
optimization approaches diversified forest portfolios will
emerge that would also provide improved levels of multiple
ecosystem services (multifunction effect).
However, there are also limitations. These include that pure
economic optimization under uncertainty will not automati-
cally optimize the levels of other ecosystem services, as sug-
gested by the Bwake theory^. Consequently, the development
of new portfolio-based methods for integrating multiple ser-
vices and their uncertainties into the optimization is necessary.
First approaches show, however, great economic losses in-
curred by multifunctional optimization. Improved optimiza-
tion could possibly find strategies to reduce these costs.
Another limitation is that most applications focus on static
forest composition and disregard the dimension of time.
Roessiger et al. [60] have shown an interesting alternative
for simultaneously considering forest composition and distri-
bution of harvesting over multiple periods. Such approaches
bear potential, combining the optimization of compositional
and time diversification.
Another aspect is acceptability of tools to simulate the con-
sequences of economic diversification. Mutenthaler and Sekot
[88] evaluated the portfolio approach by Neuner et al. [31] and
the YAFO model developed by Härtl et al. [67] based on the
opinions of Austrian forest experts. Forest experts perceived
the expected solutions and the opportunities for updating so-
lutions favorable for the portfolio approach by Neuner et al.
[31], while they judged the quantity of demanded data, objec-
tiveness and appropriateness for practical use to be unfavor-
able. The forest optimizer YAFO [67] obtained more favor-
able evaluations for expected solutions, applicability, accura-
cy, and opportunities for updating solutions, while forest man-
agers evaluated the quantity of demanded data as unfavorable.
However, the forest experts evaluated classical tools for forest
planning, which disregard diversification, as more favorable
than the more modern approaches to economic diversification.
Overall, we have shown that diversification has many more
potential benefits than only risk reduction. Consequently, for-
est and land-use policies should aim to promote rather than
103
hinder diversification strategies. Any policies, which could
potentially reduce diversification, should be considered with
care. For example, ill-conceived tax policies [89] or subsidies
could reduce the incentives for forest owners to manage risks
through land-use diversification.
Acknowledgments This review is based on past and present research
of the authors on diversification in forest and land-use management
funded by the German Research foundation (DFG KN 586/9-1 and KN
586/11-1) and the Federal Ministry of Food and Agriculture of Germany
(Waldklimafonds Project SURVIVAL-KW (FKZ: 28W-C-4-088-01)).
Compliance with Ethical Standards
Conflict of Interest The authors declare no competing interests.
Human and Animal Rights and Informed Consent This article does
not contain any studies with human or animal subjects performed by the
author.
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