Integrating prospect theory with DEA for renewable energy investment evaluation in South America

Abstract

The transition to renewable energy is critical to address climate change and energy security in South America, where abundant resources exist but investment efficiency varies across countries. Traditional evaluation methods often overlook behavioral biases and risk perceptions, resulting in incomplete assessments. This study proposes a Risk-Aware DEA (RA-DEA) model by integrating Prospect Theory with Data Envelopment Analysis to provide a comprehensive efficiency evaluation. By incorporating risk-adjusted measures, RA-DEA captures both economic performance and behavioral risk considerations, offering a more realistic view of investment decisions. Findings show Paraguay, Uruguay, and Chile exhibit higher efficiency due to supportive policies and infrastructure, while Bolivia and Venezuela face structural and institutional barriers. Including behavioral factors highlights the significance of risk perceptions in shaping investment attractiveness. Based on these insights, policy interventions that offer financial incentives, regulatory stability, and regional cooperation are recommended to reduce investment uncertainty and enhance efficiency. Strengthening institutional frameworks and risk-mitigation mechanisms can boost investor confidence and accelerate renewable energy adoption. This study significantly contributes to theory by advancing DEA methodology with Prospect Theory and to practice by providing a risk-sensitive decision-support tool. Future research could incorporate additional behavioral factors and expand the RA-DEA model to other regions.