Behavioural perspective on financial modelling choices in the US power generation industry

Georgi Nikolov Lautliev & Paul Joseph Menter

Student thesis: Master thesis

Abstract

This thesis examines the relationship between the beliefs held by financial modellers in the electrical power generation industry and the choices they make in constructing financial models of potential investments in generation capacity. Specifically, we focus on choices that impact the valuation of renewable energy fuel sources relative to fossil fuel sources, and examine beliefs affecting the modeller’s perception of renewable energy sources as viable investment alternatives. We test the relationship between these beliefs and choices empirically using survey data of 394 financial modellers in the US electrical power generation industry. Ultimately we construct a robust model of the relationships between individual beliefs and key financial modelling choices. On a theoretical level our research supports the growing body of literature demonstrating the value of incorporating the behavioural perspective into the understanding of human decision-making. On a practical level our results illustrate that despite the highly prescribed nature of investment analysis, the beliefs of financial modellers are a key determinate of investment valuations, and may be part of the explanation for the current underinvestment and slow uptake of renewable energy technology. This finding supports policy action to address the beliefs of financial modellers and other decision makers in the electrical power generation industry wherever those beliefs may impede investment in an optimal power generation portfolio. In light of the US Federal Government’s ambitious target to double the US’ production of renewable energy-sourced electricity, this thesis provides actionable evidence for an aggressive campaign to address the beliefs held in the financial modeller community, as well as identifying three specific beliefs to be addressed. Key words: Behavioural economics, decision-making, beliefs, choices, financial modelling, electric power industry

EducationsMSc in International Business and Politics, (Graduate Programme) Final Thesis
LanguageEnglish
Publication date2014
Number of pages179