Prospect Theory with Bounded Temporal Horizon for Modeling Prosumer Behavior in the Smart Grid

Mohsen Rajabpour, Mohammad Yousefvand, Robert Mulligan and Narayan B. Mandayam
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Mohsen Rajabpour: Wireless Information Network Lab (WINLAB), Department of Electrical and Computer Engineering, Rutgers, The State University of New Jersey, New Brunswick, NJ 08902, USA
Mohammad Yousefvand: Wireless Information Network Lab (WINLAB), Department of Electrical and Computer Engineering, Rutgers, The State University of New Jersey, New Brunswick, NJ 08902, USA
Robert Mulligan: The Kohl Group, Inc., Parsippany, NJ 07054, USA
Narayan B. Mandayam: Wireless Information Network Lab (WINLAB), Department of Electrical and Computer Engineering, Rutgers, The State University of New Jersey, New Brunswick, NJ 08902, USA

Energies, 2021, vol. 14, issue 21, 1-16

Abstract: We study prosumer decision-making in the smart grid in which a prosumer must decide whether to make a sale of solar energy units generated at her home every day or hold (store) the energy units in anticipation of a future sale at a better price. Specifically, we enhance a Prospect Theory (PT)-based behavioral model by taking into account bounded temporal horizons (a time window specified in terms of the number of days) that prosumers implicitly impose on their decision-making in arriving at “hold” or “sell” decisions of energy units. The new behavioral model for prosumers assumes that in addition to the framing and probability weighting effects imposed by classical PT, humans make decisions that will affect their lives within a bounded temporal horizon regardless of how far into the future their units may be sold. Modeling the utility of the prosumer with parameters such as the offered price on a day, the available energy units on a day, and the probabilities of the forecast prices, we fit the PT-based proposed behavioral model with bounded temporal horizons to prosumer data collected over 10 weeks from 57 homeowners who generated surplus units of solar power and had the opportunity to sell those units to the local utility at the price set that day by the utility or hold the units for sale in the future. For most participants, a model with a bounded temporal horizon in the range of 1–6 days provided a much better fit to their responses than was found for the traditional EUT-based model, thus validating the need to model PT effects (framing and probability weighting) and bounded temporal horizons imposed in prosumer decision-making.

Keywords: prosumer behavior; prospect theory; smart grid; demand-side management; energy management (search for similar items in EconPapers)
JEL-codes: Q Q0 Q4 Q40 Q41 Q42 Q43 Q47 Q48 Q49 (search for similar items in EconPapers)
Date: 2021
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