Application and Outlook of Prospect Theory Applied to Bounded Rational Power System Economic Decisions

Abstract

Economic decision-makingof electric power system plays a vital role in the planning, operation, and transaction of the electric power system. While the achievement of behavioral economics tells us that all the decision-making process with human involvement is not that simple. Limited to human's subjectivity on cognition and decision preference, the decision will become bounded rational. Sufficient knowledge on the behavior of power system economic decisions can improve the accuracy and practicability of decision-making modeling, simulation, and forecasting in power system, as well as improve the social elements in developing a cyber-physical-social system of the power system. Among different behavioral economic theories, prospect theory (PT) wins a wide range of research and application. Thus, PT is first introduced here, and then the application of PT is reviewed in the field of power system economic decisions. What follows is the analysis and discussion on three key issues of current theory application, including function model selection, parameter identification, and application framework establishment. Finally, three possible further research prospects are proposed, including the application of developed theory, the combination of multiple behavioral economics, and the consideration of social elements.