coordinated price maker operation of large energy storage units in nodal energy markets in this paper a new optimization framework is proposed to coordinate the operation of large price maker and geographically dispersed energy storage battery systems in a nodal transmission constrained energy market the energy storage units are assumed to be investor owned and independently operated seeking to maximize their total profit various design factors are taken into consideration such as the location size efficiency and charge and discharge rates of the energy storage units as well as the joint impact of the energy storage operations on the locational marginal prices while the formulated optimization problem is originally nonlinear and hard to solve nonlinearities are tackled both in the objective function and in the constraints and the problem is transformed into a tractable mixed integer linear program for which the global optimal solutions are found for the charge and discharge schedules of each energy storage unit both deterministic and stochastic design scenarios are addressed various case studies are presented it is observed that transmission line congestion is often but not always desirable for the coordinated storage systems locational diversity practice of arbitrage robust design self scheduling versus economic bidding and the overall power system performance are also investigated

predicting how people play games a simple dynamic model of choice we use the simple dynamic model developed in sarin and vahid 1999 games and economic behavior 28 294 309 to explain the experiments reported in erev and roth 1998 american economic review 88 848 881 in an earlier paper sarin and vahid 1998 mimeo texas a m university and monash university we showed that the model predicted behavior in repeated coordination games remarkably well and better than equilibrium theory or reinforcement learning models in this paper we show that the same one parameter model can also explain behavior in games with a unique mixed strategy nash equilibrium better than alternative models hence we obtain further support for the simple dynamic model journal of economic literature classification numbers c7 d8

sargent versus simon bounded rationality unbound t j sargent called his latest venture bounded rationality in macroeconomics and tried to make connections with h a simon s program of bounded rationality and artificial intelligence the irony is that rational expectations theory born from the same mother carnegie mellon university as bounded rationality after trying to kill her big sister then apparently came around to embracing her in the person of sargent but was simon s interpretation of bounded rationality the same as sargent s did simon and sargent mean the same by artificial intelligence not quite the different interests of sargent and simon resulted in vastly different interpretations of bounded rationality and artificial intelligence copyright 1997 by oxford university press

the market for quacks a group of n quacks plays a price competition game facing a continuum of patients who recover with probability whether or not they acquire a quack s treatment if patients chose rationally the market would be inactive i assume however that patients choose according to a boundedly rational procedure which re ects anecdotal reasoning this element of bounded rationality has signi cant

boundedly rational nash equilibrium a probabilistic choice approach we propose an equilibrium for n person finite games based on bounded rationality using the legit model of discrete choice theory at equilibrium each player uses appropriate choice probabilities given those used by the others rationality is parameterized on a continuum from complete rationality to uniform random choice results on the existence of equilibrium and on convergence to nash as rationality becomes perfect are similar to results due to mckelvey and palfrey we identify conditions such that for a given rationality parameter range the path of choices over time when the players use fictitious play converges to equilibrium c 1997 academic press

differences between continuous and discrete contingent value estimates in a split sample contingent valuation study of willingness to pay wtp for food safety improvements the dichotomous choice dc elicitation method consistently generated much larger estimates of wtp than did a continuous method little or none of these differences was due to bias introduced by the statistical techniques used with the dc data most or all of the difference was due to differences in respondent behavior in addition the continuous wtp responses showed a significant scope effect while the dc responses did not the observed difference in behavior may be attributable in part to yea saying by dc respondents

polynomially bounded rationality abstract this paper explores the conditions under which agents can learn enough about an economy to form rational expectations the agents rationality is bounded by limiting their computational resources to algorithms with running time bounded by a polynomial in the relevant problem parameters we characterize the classes of price functions and economies that agents can learn under these assumptions and present a result that suggests that it is unlikely that agents can learn even those price functions and economies computable by finite state automata this result casts doubt on the ability of agents to form rational expectations in complex economies journal of economic literature classification numbers d83 c68 c63

progress in behavioral game theory i s game theory meant to describe actual choices by people and institutions or not it is remarkable how much game theory has been done while largely ignoring this question the seminal book by von neumann and morgenstern the theory of games and economic behavior was clearly about how rational players would play against others they knew were rational in more recent work game theorists are not always explicit about what they aim to describe or advise at one extreme highly mathematical analyses have proposed rationality requirements that people and firms are probably not smart enough to satisfy in everyday decisions at the other extreme adaptive and evolutionary approaches use very simple modelsmostly developed to describe nonhuman animals in which players may not realize they are playing a game at all when game theory does aim to describe behavior it often proceeds with a disturbingly low ratio of careful observation to theorizing this paper describes an approach called behavioral game theory which aims to describe actual behavior is driven by empirical observation mostly experiments and charts a middle course between over rational equilibrium analyses and under rational adaptive analyses the recipe for behavioral game theory i will describe has three steps start with a game or naturally occurring situation in which standard game theory makes a bold prediction based on one or two crucial principles if behavior differs from interested readers familiar with game theory should read crawford 1997 whose approach is more eclectic than mine he concludes p 236 that most strategic behavior can be understood via a synthesis that combines elements from each of the leading theoretical frameworks traditional game theory evolutionary game theory and adaptive learning with a modicum of empirical information about behavior behavioral game theory adds psychological interpretations to this synthesis

comparing new keynesian models of the business cycle a bayesian approach abstract the baseline new keynesian model cannot replicate the observed persistence in inflation output and real wages for sensible parameter values as a result several extensions have been suggested to improve its fit to the data we use a bayesian approach to estimate and compare the baseline sticky price model of calvo s 1983 staggered prices in a utility maximizing framework journal of monetary economics 12 383 398 and three extensions our empirical results are as follows first we find that adding price indexation improves the fit of calvo s 1983 staggered prices in a utility maximizing framework journal of monetary economics 12 383 398 model second models with both staggered price and wage setting dominate models with only price rigidities third introducing wage indexation does not significantly improve the fit fourth all model estimates suggest a high degree of price stickiness fifth the estimates of labor supply elasticity are higher in models with both staggered price and wage contracts finally the estimated inflation parameters of the taylor rule are stable across models

modeling electricity wholesale markets with model predictive and profit maximizing agents a new agent based electricity market model is presented in which participants correspond to generation plants as well as storage power plants in contrast to agent based models where agents use learning heuristics and trial and error approaches to maximize their profits the proposed model predictive bidding uses multi step optimization to find bidding curves which maximize the expected discounted profit over a time horizon in the future the profit is calculated based on an hourly price forward curve hpfc whereby the hpfc is constructed taking several factors into account in addition a price adjuster is used in these calculations which allows the participant to take into account his market power the resulting optimization problem for each agent is solved using dynamic programming a case study is carried out in which the proposed agent based market model is applied to the four countries switzerland germany italy and france to study the effects of constrained cross border capacities the simulations show that the transmission system operators as well as the power generating units have no incentive to build additional cross border capacity since it lowers their profits

decision making under uncertainty capturing dynamic brand choice processes in turbulent consumer goods markets we construct two models of the behavior of consumers in an environment where there is uncertainty about brand attributes in our models both usage experience and advertising exposure give consumers noisy signals about brand attributes consumers use these signals to update their expectations of brand attributes in a bayesian manner the two models are 1 a dynamic model with immediate utility maximization and 2 a dynamic forward looking model in which consumers maximize the expected present value of utility over a planning horizon given this theoretical framework we derive from the bayesian learning framework how brand choice probabilities depend on past usage experience and advertising exposures we then form likelihood functions for the models and estimate them on nielsen scanner data for detergent we find that the functional forms for experience and advertising effects that we derive from the bayesian learning framework fit the data very well relative to flexible ad hoc functional forms such as exponential smoothing and also perform better at out of sample prediction another finding is that in the context of consumer learning of product attributes although the forward looking model fits the data statistically better at conventional significance levels both models produce similar parameter estimates and policy implications our estimates indicate that consumers are risk averse with respect to variation in brand attributes which discourages them from buying unfamiliar brands using the estimated behavioral models we perform various scenario evaluations to find how changes in marketing strategy affect brand choice both in the short and long run a key finding obtained from the policy experiments is that advertising intensity has only weak short run effects but a strong cumulative effect in the long run the substantive content of the paper is potentially of interest to academics in marketing economics and decision sciences as well as product managers marketing research managers and analysts interested in studying the effectiveness of marketing mix strategies our paper will be of particular interest to those interested in the long run effects of advertising note that our estimation strategy requires us to specify explicit behavioral models of consumer choice behavior derive the implied relationships among choice probabilities past purchases and marketing mix variables and then estimate the behavioral parameters of each model such an estimation strategy is referred to as structural estimation and econometric models that are based explicitly on the consumer s maximization problem and whose parameters are parameters of the consumers utility functions or of their constraints are referred to as structural models a key benefit of the structural approach is its potential usefulness for policy evaluation the parameters of structural models are invariant to policy that is they do not change due to a change in the policy in contrast the parameters of reduced form brand choice models are in general functions of marketing strategy variables e g consumer response to price may depend on pricing policy as a result the predictions of reduced form models for the outcomes of policy experiments may be unreliable because in making the prediction one must assume that the model parameters are unaffected by the policy change since the agents in our models choose among many alternative brands their choice probabilities take the form of higher order integrals we employ monte carlo methods to approximate these integrals and estimate our models using simulated maximum likelihood estimation of the dynamic forward looking model also requires that a dynamic programming problem be solved in order to form the likelihood function for this we use a new approximation method based on simulation and interpolation techniques these estimation techniques may be of interest to researchers and policy makers in many fields where dynamic choice among discrete alternatives is important such as marketing decision sciences labor and health economics and industrial organization

dynamic convexification within nested benders decomposition using lagrangian relaxation an application to the strategic bidding problem abstract many decomposition algorithms like benders decomposition and stochastic dual dynamic programming are limited to convex optimization problems in this paper we utilize a dynamic convexification method that makes use of lagrangian relaxation to overcome this limitation and enables the modeling of non convex multi stage problems using decomposition algorithms though the algorithm is confined by the duality gap of the problem being studied the computed upper bounds for maximization problems are at least as good as those found via a linear programming relaxation approach we apply the method to the strategic bidding problem for a hydroelectric producer in which we ask what is the revenue maximizing production schedule for a single price maker hydroelectric producer in a deregulated bid based market because the price maker s future revenue function has a sawtooth shape we model it using mixed integer linear programming to remedy the non concavity issues associated with modeling the future revenue function as a mixed integer linear program we model the price maker s bidding decision utilizing both benders decomposition and lagrangian relaxation we demonstrate the utility of our algorithm through an illustrative example and through three case studies in which we model electricity markets in el salvador honduras and nicaragua

expectation calculation and macroeconomic dynamics the authors establish a framework wherein agents make expectation revision decisions subject to a specified calculation technology and preferences over forecast errors the technology endows agents with correctly specified economic models but the cost of expectation calculation using these models leads to gradual and incomplete adjustment to long run rational expectation equilibrium the rational expectations hypothesis emerges as a special case of the equilibrium paths obtained in the authors framework in a natural rate model of monetary policy calculation technology gives rise to long run nonneutrality and hysteresis effects and incomplete adjustment of forecast rules causes output fluctuations to be amplified copyright 1992 by american economic association

nash equilibrium in strategic bidding a binary expansion approach this paper presents a mixed integer linear programming solution approach for the equilibrium problem with equilibrium constraints epec problem of finding the nash equilibrium ne in strategic bidding in short term electricity markets a binary expansion be scheme is used to transform the nonlinear nonconvex ne problem into a mixed integer linear problem milp which can be solved by commercially available computational systems the be scheme can be applicable to cournot bertrand or joint price quantity bidding models the approach is illustrated in case studies with configurations derived from the 95 gw brazilian system including unit commitment decisions to the price maker agents

correlated equilibrium as an expression of bayesian rationality if it is common knowledge that the players in a game are bayesian utility maximizers who treat uncertainty about other players actions like any other uncertainty then the outcome is necessarily a correlated equilibrium random strategies appear as an expression of each player s uncertainty about what the others will do not as the result of willful randomization use is made of the common prior assumption according to which differences in probability assessments by different individuals are due to the different information that they have where information may be interpreted broadly to include experience upbringing and genetic makeup copyright 1987 by the econometric society

limited horizon forecast in repeated alternate games abstract in two player infinite horizon alternating move games a limited forecast n 1 n 2 equilibrium is such that 1 player i chooses actions according to his n i length forecasts so as to maximise the average payoff over the forthcoming n i periods and 2 players equilibrium forecasts are correct with finite action spaces n 1 n 2 solutions always exist and are cyclical and the memory capacity of the players has no influence on the set of solutions a solution is hyperstable if it is an n 1 n 2 solution for all n 1 n 2 sufficiently large hyperstable solutions are shown to exist and are characterized for generic repeated alternate move 2 2 games journal of economic literature classification numbers c72 d81

noisy directional learning and the logit equilibrium we specify a dynamic model in which agents adjust their decisions toward higher payoffs subject to normal error this process generates a probability distribution of players decisions that evolves over time according to the fokker planck equation the dynamic process is stable for all potential games a class of payoff structures that includes several widely studied games in equilibrium the distributions that determine expected payoffs correspond to the distributions that arise from the logit function applied to those expected payoffs this logit equilibrium forms a stochastic generalization of the nash equilibrium and provides a possible explanation of anomalous laboratory data

a review on risk constrained hydropower scheduling in deregulated power market in deregulated power market hydro producer has in principle no other objective than to produce electricity and sell with maximum profit with lower market risk attention must focus on profit uncertainty caused by uncertainty in spot prices and reservoir inflow the purpose of this review is to assess the state of the art in hydropower operations considering profit risk under uncertainty and consider future directions for additional research and application physical and financial tools to hedge risk in bilateral market and risk assessment methods are all discussed in detail furthermore production resources can also be used to manage risk to a certain extent this concept when be integrated with variety of risk management methods under stochastic optimal framework has operational significance for hydro producer participating in electricity market

heterogeneous quantal response equilibrium and cognitive hierarchies we explore an equilibrium model of games where behavior is given by logit response functions but payoff responsiveness and beliefs about others responsiveness are heterogeneous we study two substantively different ways of extending quantal response equilibrium qre to this setting 1 heterogeneus qre where players share identical correct beliefs about the distribution of payoff responsiveness and 2 truncated qre where players have downward looking beliefs systematically underestimating others responsiveness we show that the cognitive hierarchy model is a special case of truncated qre we conduct experiments designed to differentiate these approaches we find significant evidence of payoff responsive stochastic choice and of heterogeneity and downward looking beliefs in some games

hydrothermal market simulator using game theory assessment of market power the aim of this work is to build a model able to simulate a hydrothermal electric power market based on simple bids to a power exchange the model studies the behavior of different market agents in a short term horizon and delivers information about spot prices use of water and other relevant variables initially a thermoelectric market is simulated through a static model based on cournot concepts the addition of hydroelectric power stations and time dependencies is made later using a dynamic programming algorithm to build a dynamic model in each stage and state of the dynamic programming a nash cournot equilibrium is determined to assess the behavior of the thermoelectric power stations static model different strategies that firms can follow and the consequences of each one of them are analyzed market power mitigation effects of physical and financial bilateral contracts are also investigated a case study with data on the chilean power system is presented and analyzed

weekly self scheduling forward contracting and pool involvement for an electricity producer an adaptive robust optimization approach abstract this paper addresses the optimization under uncertainty of the self scheduling forward contracting and pool involvement of an electricity producer operating a mixed power generation station which combines thermal hydro and wind sources and uses a two stage adaptive robust optimization approach in this problem the wind power production and the electricity pool price are considered to be uncertain and are described by uncertainty convex sets to solve this problem two variants of a constraint generation algorithm are proposed and their application and characteristics discussed both algorithms are used to solve two case studies based on two producers each operating equivalent generation units differing only in the thermal units characteristics their market strategies are investigated for three different scenarios corresponding to as many instances of electricity price forecasts the effect of the producers approach whether conservative or more risk prone is also investigated by solving each instance for multiple values of the so called budget parameter it was possible to conclude that this parameter influences markedly the producers strategy in terms of scheduling profit forward contracting and pool involvement these findings are presented and analyzed in detail and an attempted rationale is proposed to explain the less intuitive outcomes regarding the computational results these show that for some instances the two variants of the algorithms have a similar performance while for a particular subset of them one variant has a clear superiority

tacit cooperation strategic uncertainty and coordination failure evidence from repeated dominance solvable games abstract this paper reports an experiment designed to discover how the prospect of future interaction influences people s ability to tacitly cooperate in repeated dominance solvable games the experiment varies two treatment variables whether the constituent game is solvable by strict or iterated dominance and whether prospective interaction is finitely or randomly terminated specifically we introduce a special repeated matching protocol consisting of an initial phase terminated randomly and a terminal phase of t periods we call this protocol t death the t death protocol allows us to observe a pair s behavior in both a sequence of infinite continuation games and a sequence of finite continuation games journal of economic literature classification numbers c720 c920 1120 1400

optimal coordinated wind hydro bidding strategies in day ahead markets wind and hydro technologies represent an important part of the electricity generation sector however there have been few detailed studies that have investigated the synergies resulting from their combined operation to address that we formulate three optimization models where wind and reversible hydro technologies bid in a day ahead market the bidding strategies are divided into three categories 1 separate wind and reversible hydro offers without a physical connection between them 2 separate wind and reversible hydro offers with a physical connection to store by pumping the wind energy surplus and 3 single wind and reversible hydro offers with a physical connection risk is considered in the models by means of the conditional value at risk cvar a comparison of the models and relevant conclusions are drawn from an illustrative case study of the iberian day ahead electricity market

a new keynesian model with heterogeneous expectations abstract within a new keynesian model we incorporate bounded rationality at the individual agent level and we determine restrictions on expectations operators sufficient to imply aggregate is and as relations of the same functional form as those under rationality this result provides dual implications the strong nature of the restrictions required to achieve aggregation serve as a caution to researchers imposing heterogeneous expectations at an aggregate level may be ill advised on the other hand accepting the necessary restrictions provides for tractable analysis of expectations heterogeneity as an example we consider a case where a fraction of agents are rational and the remainder are adaptive and find specifications that are determinate under rationality may possess multiple equilibria in case of expectations heterogeneity

anomalous behavior in a traveler s dilemma the notion of a nash equilibrium has joined supply and demand as one of the two or three techniques that economists instinctively try to use first in the analysis of economic interactions moreover the nash equilibrium and closely related game theoretic concepts are being widely applied in other social sciences and even in biology where evolutionary stability often selects a subset of the nash equilibria many people are uneasy about the stark predictions of the nash equilibrium in some contexts where the extreme rationality assumptions seem implausible kaushik basu s 1994 traveler s dilemma is a particularly convincing example of a case where the unrelenting logic of game theory is at odds with intuitive notions about human behavior the story associated with the dilemma is that two travelers purchase identical antiques while on a tropical vacation their luggage is lost on the return trip and the airline asks them to make independent claims for compensation in anticipation of excessive claims the airline representative announces

a theory of anticipated utility abstract a new theory of cardinal utility with an associated set of axioms is presented it is a generalization of the von neumann morgenstern expected utility theory which permits the analysis of phenomena associated with the distortion of subjective probability

least squares learning and business cycles abstract this paper investigates whether the neoclassical growth framework augmented with least squares estimated heuristic rules may reproduce u s business cycles i consider various assumptions about the length of the information set the influence of contemporaneous data on current forecasts and the limit case in which learning is completed calibrated to the u s economy this model may generate endogenous business cycles that do not exist under perfect foresight if random productivity shocks are introduced then the model is more volatile than under rational expectations or constant gain learning and reproduces some key u s business cycles stylized facts

an individual welfare maximization algorithm for electricity markets an algorithm that allows a market participant to maximize its individual welfare in electricity spot markets is presented the use of the algorithm in determining market equilibrium points called nash equilibria is demonstrated the start of the algorithm is a spot market model that uses the optimal power flow opf with a full representation of the transmission system and inclusion of consumer bidding the algorithm utilizes price and dispatch sensitivities available from the hessian matrix and gradient of the opf to help determine an optimal change in an individual s bid the algorithm is shown to be successful in determining local welfare maxima and the prospects for scaling the algorithm up to realistically sized systems are very good nash equilibria are investigated assuming all participants attempt to maximize their individual welfare this is done by iteratively solving the individual welfare maximization algorithm until all individuals stop modifying their bids

commodity prices as payment vehicles in valuation experiments many contingent valuation experiments use commodity prices as the payment vehicle in this note it is shown in general that this approach does not allow the investigator to extract the respondent s willingness to pay however it is also shown how the valuation question can be formulated so as to yield a commodity price payment vehicle which is equivalent to a lump sum payment

price maker economic bidding in two settlement pool based markets the case of time shiftable loads in this paper a new scenario based stochastic optimization framework is proposed for price maker economic bidding in day ahead and real time markets the presented methodology is general and can be applied to both demand and supply bids that is no restrictive assumptions are made on the characteristics of the pool and its agents however our focus is on the operation of time shiftable loads with deadlines because they play a central role in creating load flexibility and enhancing demand response and peak load shaving programs both basic and complex time shiftable load types are addressed where the latter includes time shiftable loads that are uninterruptible have per time slot consumption limits or ramp constraints or comprise several smaller time shiftable subloads four innovative analytical steps are presented in order to transform the originally nonlinear and hard to solve price maker economic bidding optimization problem into a tractable mixed integer linear program accordingly the global optimal solutions are found for the price and energy bids within a relatively short amount of computational time a detailed illustrative case study along with multiple case studies based on the california energy market data are presented it is observed that the proposed optimal price maker economic bidding approach outperforms optimal price maker self scheduling as well as even load distribution

games of perfect information predatory pricing and the chain store paradox the thesis of this paper is that finite noncooperative games possessing both complete and perfect information ought to be treated like one player decision problems that is players ought to assign at every move subjective probabilities to every subsequent choice in the game and ought to make decisions via backward induction this view is in contrast with the gametheoretic approach of nash equilibrium after expanding on this view for games in the abstract in sections 2 and 3 attention is turned in section 4 to an example due to reinhard selten called the chain store paradox which possesses the flavor of a situation involving a predatory pricing monopolist it is argued that for the chain store game the decision analytic approach leads under certain assumptions to more realistic outcomes than the standard nash equilibrium approach

food safety issues and the bse scare some lessons from the french case abstract the bovine spongiform encephalopathy bse scare began after the uk minister of health admitted a possible link between the bse prion and the creutzfeldt jakob disease contaminating humans the paper outlines a survey conducted in the area of rennes to analyse consumer behaviour after the bse crisis a contingent scenario was proposed to determine the willingness to pay wtp for beef which should not transmit cjd using a mix of the referendum method and the bidding process the variables considered as main determinants of the wtp have been selected the study concludes with the interests and limits of the method used and the implications of the bse scare on food policy in fact the mad cow disease raises the problem of loss of public confidence and the means to restore it consumers are waiting for a greater transparency or traceability and according to the survey would accept to pay for it

the electronic mail game strategic behavior under almost common knowledge the paper addresses a paradoxical game theoretic example which is closely related to the coordinated attack problem two players have to play one of two possible coordination games only one of them receives information about the coordination game to be played it is shown that the situation with almost common knowledge is very different from when the coordination game played is common knowledge

limited rationality and strategic complements the implications for macroeconomics this paper considers the implications of heterogeneity in information processing abilities for macroeconomic models that exhibit strategic complements the latter is the same concept that has received much attention in the recent macro literature under the headings keynesian coordination problems and positive trading externalities we consider environments in which agents vary in terms of their ability to form expectations and ask whether it is the sophisticated agents or the naive agents who have a disproportionately large effect on macroeconomic equilibrium we find that if macroeconomic interaction exhibits strategic complementarity then it is the naive agents who have a disproportionate impact

adaptive behavior and economic theory the relationship between psychological and economic views of behavior once a subject of heavy dispute is now understood in a very similar way by practitioners of both these disciplines and of our sister social sciences in general terms we view or model an individual as a collection of decision rules rules that dictate the action to be taken in given situations and a set of preferences used to evaluate the outcomes arising from particular situation action combinations these decision rules are continuously under review and revision new decision rules are tried and tested against experience and rules that produce desirable outcomes supplant those that do not i use the term adaptive to refer to this trial anderror process through which our modes of behavior are determined if one is interested in modeling particular decisions in any very explicit way it is obviously necessary to think about rather narrow aspects of an individual s entire set of decision rules his or her personality experimental psychology has traditionally focused on the adaptive process by which decision rules are replaced by others in this tradition the influence of the subject s or as an economist says the agent s preferences this essay uses a series of examples to illustrate the use of rationality and adaptation in economic theory it is argued that these hypotheses are complementary and that stability theories based on adaptive behavior may help to narrow the class of empirically interesting equilibria in certain economic models an experiment is proposed to test this idea

market offering strategies for hydroelectric generators this paper considers the problem of offering electricity produced by a series of hydroelectric reservoirs to a pool type central market the market model is a simplified version of the new zealand wholesale electricity market with prices modelled by a first order markov process the demand for electricity is not explicitly modelled the hydroelectric generator is assumed to be unable to influence market prices i e to be a price taker we discuss the resulting stochastic dynamic program methods for its solution and the explicit optimal offer curves that it produces it is shown that the utility function is monotone increasing with respect to both reservoir level and current price however the optimal offer curves need not be monotone this is shown by example numerical results are provided

experimentation imitation and stochastic stability abstract do boundedly rational agents repeatedly playing a symmetric game with a unique symmetric equilibrium learn over time to play it in this paper we model the dynamic interaction of two types of such agents experimenters and imitators whose behavior is characterized by simple rules of thumb we find that the stochastic process describing their play isstable in the large it converges globally and with probability one to a compact neighborhood of the equilibrium however its local behavior near the equilibrium depends in interesting ways on the details of the model journal of economic literatureclassification number d83

pesticide residue risk and food safety valuation a random utility approach a new approach is developed for integrating consumers risk perceptions with stated purchase behavior when consumption decisions must be made with incomplete information the application involves health risks from exposure to pesticide residues on fresh produce unlike traditional food demand analysis the present approach treats produce choices as discrete outcomes resulting in a random utility model empirical results from a pilot survey suggest a clear linkage between perceptions and behavior in response to new risk information consumers stated preferences for safer produce were primarily influenced by price differences and perceived risks not by the technical risk information provided alone however the linkage between behavior and valuation was less clear cut the risk price tradeoffs entailed by contingent discrete choices indicate high price premia for small risk reductions and little variation in price premium across alternative risk reductions

pool strategy of a price maker wind power producer we consider the problem of a wind power producer trading energy in short term electricity markets the producer is a price taker in the day ahead market but a price maker in the balancing market and aims at optimizing its expected revenues from these market floors the problem is formulated as a mathematical program with equilibrium constraints mpec and cast as a mixed integer linear program milp which can be solved employing off the shelf optimization software the optimal bid is shown to deliver significantly improved performance compared to traditional bids such as the conditional mean or median forecast of wind power distribution finally sensitivity analyses are carried out to assess the impact on the offering strategy of the producer s penetration in the market of the correlation between wind power production and residual system deviation and of the shape of the forecast distribution of wind power production

emotional arousal as a source of bounded rationality abstract this paper proposes an alternative psychological explanation for bounded rationality according to herbert simon bounded rationality arises from human cognitive limitations following the suggestion of institutional economist john r commons i argue that extremes in emotional arousal also contribute to bounded rationality this idea is formalized and developed using the yerkes dodson law from psychology examples from the popular press and the academic literatures of law management and economics are presented to illustrate the impact of this type of bounded rationality on human behavior

an empirical model of strategic choice with an application to coordination games abstract behavior observed in many experimental games is inconsistent with the joint hypotheses of rational play and complete information of the game i assume that the experimental session is a bayesian game of incomplete information and that the observed actions are supported by an equilibrium of this game this structure permits estimation within the theoretical model of the distribution of player characteristics which determines the equilibrium outcomes of the game the model developed for the coordination games allows a type that follows a myopic learning rule as well as strategic types with either selfish or altruistic preferences journal of economic literature classification numbers c72 c92

experimental valuation of food safety abstract nearly 60 of the sewage sludge in france is recycled in agriculture sludge serves as a fertilizer but contains micropollutants this could modify the consumer s perceived safety concerning the vegetables grown with sludge in the same way as nutritional value safety is an attribute of food food safety is a public good and in this respect has no explicit price a consumer is willing to pay for it if he perceives a risk to his health the purpose of this study is to give a value to food safety relative to the practice of sewage sludge disposal on agricultural soils experimental economics is a support to elicit the willingness to pay for safety risks linked to one heavy metal cadmium have been chosen they are supposed to be very low and difficult to assess because of the uncertainties involved in the food chain process

generation scheduling in a deregulated system the norwegian case the paper gives an overview of the deregulated electricity supply system in norway with emphasis on the generation scheduling approach procedures and tools for long medium and short term scheduling are described scheduling is carried out by each individual utility since scheduling is based on profit maximizing the spot market price is a very important factor this price is varying and uncertain however a part of the paper describes how to deal with this by considering the spot market price as an exogenously given stochastic variable it is shown how to extend the common water value computations so as to handle this case implications to the medium and short term scheduling are also discussed

perceptrons play the repeated prisoner s dilemma abstract we examine the implications of bounded rationality in repeated games by modeling the repeated game strategies as perceptrons f rosenblatt principles of neurodynamics spartan books and m minsky and s a papert perceptions an introduction to computational geometry mit press cambridge ma 1988 in the prisoners dilemma game if the cooperation outcome is pareto efficient then we can establish the folk theorem by perceptrons with single associative units minksy and papert whose computational capability barely exceeds what we would expect from players capable of fictitious plays e g l shapley some topics in two person games adv game theory5 1964 1 28 journal of economic literature classification number c72

generation expansion planning with large amounts of wind power via decision dependent stochastic programming power generation expansion planning needs to deal with future uncertainties carefully given that the invested generation assets will be in operation for a long time many stochastic programming models have been proposed to tackle this challenge however most previous works assume predetermined future uncertainties i e fixed random outcomes with given probabilities in several recent studies of generation assets planning e g thermal versus renewable new findings show that the investment decisions could affect the future uncertainties as well to this end this paper proposes a multistage decision dependent stochastic optimization model for long term large scale generation expansion planning where large amounts of wind power are involved in the decision dependent model the future uncertainties are not only affecting but also affected by the current decisions in particular the probability distribution function is determined by not only input parameters but also decision variables to deal with the nonlinear constraints in our model a quasi exact solution approach is then introduced to reformulate the multistage stochastic investment model to a mixed integer linear programming model the wind penetration investment decisions and the optimality of the decision dependent model are evaluated in a series of multistage case studies the results show that the proposed decision dependent model provides effective optimization solutions for long term generation expansion planning

risk constrained scheduling and offering strategies of a price maker hydro producer under uncertainty this paper presents a stochastic mixed integer linear programming smilp approach to maximize total expected profit of one price maker hydro producer in a pool based electricity market head dependence commitment decisions discharge ramping startup costs and forbidden zones are all effectively handled in our approach uncertainty about the competitors offers is adequately represented by residual demand curves rdcs scenarios the management of risk is suitably addressed by conditional value at risk cvar to provide the efficient frontier i e the solutions set for which the expected profit may not be augmented without enlarging the variance of profit appropriate offering strategies to the pool are also developed consisting of supply functions built for different risk levels a representative cascaded hydro system with 7 reservoirs is considered to analyze and compare risk neutral versus risk averse results

a simulation model for a competitive generation market the simulation of a wholesale electricity market should go beyond a simple optimization based on the operating costs of the generating units a model of a competitive electricity market must consider the market structure the strategy of the market participants and any other factor that lead to prices different from costs this paper presents cosmee a model of a wholesale electricity market based on simple bids that estimates expected bid prices and quantities system hourly prices and generation schedules taking into account the bidding strategies of generators and the structure of the market the model reflects the profit maximizing behavior of the market agents subject to different types of constraints cosmee has been used to simulate a real wholesale market

strategic bidding under uncertainty a binary expansion approach this work presents a binary expansion be solution approach to the problem of strategic bidding under uncertainty in short term electricity markets the be scheme is used to transform the products of variables in the nonlinear bidding problem into a mixed integer linear programming formulation which can be solved by commercially available computational systems the be scheme is applicable to pure price pure quantity or joint price quantity bidding models it is also possible to represent transmission networks uncertainties scenarios for price quantity plant availability and load financial instruments capacity reinforcement decisions and unit commitment the application of the methodology is illustrated in case studies with configurations derived from the 80 gw brazilian system

modelling cognitively bounded rationality an evaluative taxonomy abstract since its origins in the 1950s the notion of bounded rationality has been incorporated into economic theory using an array of methodological approaches this paper presents a taxonomy by which these approaches can be categorized and understood evaluating each approach against a range of important criteria at a time when the foundations of economic theory are being re examined this paper should be viewed as a first step towards an assessment of the appropriate role that this more realistic view of cognition should take in different areas of economic theory and also of the desirable characteristics of models that incorporate it

price maker self scheduling in a pool based electricity market a mixed integer lp approach this paper addresses the self scheduling problem faced by a price maker to achieve maximum profit in a pool based electricity market an exact and computationally efficient mixed integer linear programming milp formulation of this problem is presented this formulation models precisely the price maker capability of altering market clearing prices to its own benefits through price quota curves no assumptions are made on the characteristics of the pool and its agents a realistic case study is presented and the results obtained are analyzed in detail

the macroeconomic effects of false announcements suppose that the government were to announce the economy will be booming in six months and this announcement is based on false data what effect would such an announcement have on future aggregate activity this paper employs revisions of the series of leading economic indicators to test the hypothesis that such an announcement would have a positive effect on future activity we find that the evidence is generally consistent with the hypothesis and that for the time period 1976 1988 the expectational shocks measured by these revisions explain over 20 percent of the fluctuation in the quarterly growth rate of industrial production

similarity judgments and anomalies in intertemporal choice i introduction evidence accumulated over many years reveals the inadequacies of the expected utility hypothesis as a descriptive model of choice under uncertainty over a much shorter period of time evidence has accumulated revealing systematic violations of the standard model of choice over time the discounted utility model in rubinstein 1988 azipurua et al 1993 and leland 1994 1998 choice anomalies under uncertainty occur because agents base their decisions on judgments regarding the similarity or dissimilarity of prizes and probabilities across alternatives 1 this article specifies conditions under which such a procedure implies analogous violations of the discounted utility model in intertemporal settings ii choice anomalies under uncertainty and over time axioms assumed in models of choice place restrictions on what agents can choose across different pairs of alternatives the independence axiom for example requires that for risky or riskless options l sub 1 l sub 2 and l sub 3 if l sub 1 is weakly preferred to l sub 2 then the lottery l sub 1 p l sub 3 1 p must be weakly preferred to the lottery l sub 2 p l sub 3 1 p for any p one consequence of this requirement is that preferences between simple lotteries x sub 1 p sub 1 0 1 p sub 1 and x sub 2 p sub 2 0 1 p sub 2 must be invariant to changes in the values of p sub 1 and p sub 2 which leave their ratio undisturbed in choices between s and r and between s and r for example independence requires either the choice of s and s or the choice of r and r s 3000 0 90 0 0 10 r 6000 0 45 0 0 55 s 3000 0 02 0 0 98 r 6000 0 01 0 0 99 the stationarity assumption of the discounted utility model of intertemporal choice places restrictions on how agents can choose between pairs of intertemporal prospects consider simple intertemporal prospects t sub j and t sub k shown below where t sub j offers an increment to consumption x sub j in time period t sub j and t sub k offers an increment to consumption x sub k in time period t sub k t sub j x sub j t sub j t sub k x sub k t sub k assuming for simplicity a common baseline level of consumption per period c agents deciding between these options according to the discounted utility model will choose as follows where u is a concave ratio scaled utility function delta is the one period discount factor and and denote strict preference and indifference respectively 2 1 formula not reproducible in ascii dividing through by delta sub j and rearranging terms yields the following expression 2 formula not reproducible in ascii expression 2 reveals that the only way discounting enters into the decision is through the absolute difference in the time periods as such agents given choices between t sub 1 and t sub 2 and between t sub 11 and t sub 12 shown below must either select t sub 1 and t sub 11 or t sub 2 and t sub 12 since the absolute time interval in both choices is identically 1 period t sub 1 20 1 month t sub 2 25 2 months t sub 11 20 11 months t sub 12 25 12 months neither the restrictions implied by the independence axiom nor those following from stationarity hold empirically instead regarding the independence axiom kahneman and tversky 1979 among others find that individuals choosing the safer option s over r nevertheless choose the riskier option r over s as the difference between probabilities declines their ratio held constant this phenomenon is referred to as the common ratio effect they also find that for lotteries involving losses the opposite pattern rs obtains this phenomenon is referred to as the reflection effect

coherent arbitrariness stable demand curves without stable preferences economic theories of valuation generally assume that prices of commodities and assets are derived from underlying fundamental values for example in finance theory asset prices are believed to reflect the market estimate of the discounted present value of the asset s payoff stream in labor theory the supply of labor is established by the tradeoff between the desire for consumption and the displeasure of work finally and most importantly for this chapter consumer microeconomics assumes that the demand curves for consumer products chocolates cds movies vacations drugs and so forth can be ultimately traced to the valuation of pleasures that consumers anticipate receiving from these products because it is difficult as a rule to measure fundamental values directly empirical tests of economic theory typically examine whether the effects of changes in circumstances on valuations are consistent with theoretical prediction for example whether labor supply responds appropriately to a change in the wage rate whether compensated demand curves for commodities are downward sloping or whether stock prices respond in the predicted way to share repurchases however such comparative static relationships are a necessary but not sufficient condition for fundamental valuation e g summers 1986 becker 1962 was perhaps the first to make this point explicitly when he observed that consumers choosing commodity bundles randomly from their budget set would nevertheless produce downward sloping demand curves

market power assessment and mitigation in hydrothermal systems the objective of this paper is to investigate market power issues in bid based hydrothermal scheduling initially market power is simulated with a single stage nash cournot equilibrium model market power assessment for multiple stages is then carried through a stochastic dynamic programming scheme the decision in each stage and state is the equilibrium of a multi agent game thereafter mitigation measures specially bilateral contracts are investigated case studies with data taken from the brazilian system are presented and discussed

multimarket optimal bidding for a power producer this paper considers a profit maximizing thermal producer that participates in a sequence of spot markets namely day ahead automatic generation control agc and balancing markets the producer behaves as a price taker in both the day ahead market and the agc market but as a potential price maker in the volatile balancing market the paper provides a stochastic programming methodology to determine the optimal bidding strategies for the day ahead market uncertainty sources include prices for the day ahead and agc markets and balancing market linear price variations with the production of the thermal producer results from a realistic case study are reported and analyzed conclusions are duly drawn

cournot competition organization and learning abstract we model firms output decisions in a repeated duopoly framework focusing on three interrelated issues 1 the role of learning in the adjustment process toward equilibrium 2 the role of organizational structure in the firm s decision making and 3 the role of changing environmental conditions on learning and output decisions we characterize the firm as a type of artificial neural network which must estimate its optimal output decision based on signals it receives from the economic environment which influences the demand function via simulation analysis we show 1 how organizations learn to estimate the optimal output over time as a function of the environmental dynamics 2 which networks are optimal for each level of environmental complexity and 3 the equilibrium industry structure

optimal bidding strategies for hydro electric producers a literature survey in a competitive environment with bid based markets power generation companies desire to develop bidding strategies that maximize their revenue in this paper we ask what approaches and methodologies have been used to model the bidding problem for hydro electric producers we present the problem s developments over time and through reviewing different variants of the problem progressively build to the case in which the agent is a price maker hydro electric producer in each variant of the bidding problem we examine how the approaches used to solve it may or may not be applicable to other variants last for the price maker hydro electric producer s bidding problem we recognize the most recent developments and illuminate a path for future efforts