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

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. • The theoretical foundation of boundedly rational investment behavior is established. • Prospect theory is incorporated into a long-term agent-based simulation model. • The impact of boundedly rational investment behavior on system evolution is assessed. • Reference dependence element can largely shape the electric power system evolution. • The status of the investors should be considered in energy policy evaluation. [ABSTRACT FROM AUTHOR]