Exploring the impact of boundedly rational power plant investment decision-making by applying prospect theory

Zhenmin Tao, Jorge Andres Moncada and Erik Delarue

Utilities Policy, 2023, vol. 82, issue C

Abstract: In liberalized electricity markets, empirical findings suggest that power plant investment decision-making under uncertainty exhibits bounded rationality. This study leverages the Nobel-prize-winning theory – prospect theory – to evaluate the impact of various boundedly rational elements on electric power system transition. Results show that boundedly rational investment behavior renders higher uncertainties and higher system costs. Further analysis highlighted that reference dependence, a factor overlooked in existing studies, can dominate the system's evolution. In light of the presented results, it could be relevant for energy policy evaluation to consider, among others, the perspective and status of investors.

Keywords: Agent-based modeling; Prospect theory; Investment decision-making (search for similar items in EconPapers)
Date: 2023
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Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:juipol:v:82:y:2023:i:c:s0957178723000346

DOI: 10.1016/j.jup.2023.101522

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