  Active consumer participation is seen as an integral part of the emerging
smart grid. Examples include demand-side management programs, incorporation of
consumer-owned energy storage or renewable energy units, and active energy
trading. However, despite the foreseen technological benefits of such
consumer-centric grid features, to date, their widespread adoption in practice
remains modest. To shed light on this challenge, this paper explores the
potential of prospect theory, a Nobel-prize winning theory, as a
decision-making framework that can help understand how risk and uncertainty can
impact the decisions of smart grid consumers. After introducing the basic
notions of prospect theory, several examples drawn from a number of smart grid
applications are developed. These results show that a better understanding of
the role of human decision-making within the smart grid is paramount for
optimizing its operation and expediting the deployment of its various
technologies.
