Bounded rational decision-making modeling and analysis in local energy markets: A state-of-the-art review

The prevailing literature typically models energy prosumers in local energy markets (LEMs) as fully rational actors whose primary goal is to maximize economic profits. However, this assumption neglects the fact that LEM participants are predominantly small-scale residential users, whose decisions are often shaped by bounded rationality due to limited information, cognitive constraints, and low transaction expertise. They exhibit subjective preferences, leading to decision-making that deviates from theoretical optima. This interdisciplinary review systematically investigates the bounded rationality factors influencing prosumers’ decision-making in LEMs. This study integrates behavioral economics, game theory, and incomplete information to model irrational decision-making in local energy markets (LEMs). These models are applied across heterogeneous market levels to capture the diversity of trading behaviors. An online survey in China and subsequent empirical analysis validate the theoretical assumptions, offering evidence-based insights for policy design to improve LEM efficiency and sustainability. Our findings provide critical insights into LEM participant behavior, leading to policy recommendations aimed at enhancing market efficiency and sustainability. This study outlines prospects for sustainable development, identifies open research questions, and proposes future research directions, thereby contributing significantly to the discourse on LEMs and their role in the broader energy transition.