Professional Documents
Culture Documents
02/05&02/10, 2015
Outline
Binary Choices
maximization
Binary Choices
Choice set: Cn={alter. 1, alter. 2}
Choice tree
Travel decision
Alter. 1
Alter. 2
Examples
Travel decisions: travel or not
Payment types: paying tolls by E-ZPass or cash
4
U1n V1n 1n
Error
Alter. 2:
U 2n V2 n 2 n
Systematic component
Alter. 1:
Alter. 2:
Error Terms
We assume the distributions of the error terms in
n jn in
We get:
uniform distribution
f ( n ) : Density function of the error
difference
0, n L or n L
f ( n ) 1
,
L n L
2L
-L
1
2L
n jn in
Pn (i )
0, Vin V jn L
V V L
in
jn
f ( n )d n
, L Vin V jn L
2
L
1, Vin V jn L
0.5
450
-L
10
Vin V jn
Vin V jn L
2L
Vin V jn L,
L Vin V jn L
1 1
We get:
pn (i )
L L
2L
1
,
2
1 1
distributions
Since the error terms represent the combination
of various sources of randomness, by the central
limit theorem, their distributions would tend to be
normal
Note: central limit theorem states that the reaveraged sum of a sufficiently large number of
identically distributed independent random
variables, each with finite mean and variance, will
be approximately normally distributed
12
f ( n ) (Density function)
1
1
f ( n )
exp[ n ]
2
2
2
0
13
Pn (i )
f ( n )d n
1
1
exp[ ]d n
2
2
1 (Vin V jn ) /
1 2
exp[ ]d
2
2
Vin V jn
(
)
2
Vin V jn
0.5
Vin V jn
:
We choose 1
The value of
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logistic distribution
It is probitlike: it resembles the normal
16
e
(1 e
n 2
, 0, n
Where:
= a positive scale
parameter
s = set as 1 for the binary
logit case
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Pn (i )
f ( n )d n
Vin V jn
(1 e
1
n 2
(V V )
1 e in jn
e Vin
V
V
e in e jn
18
d n
0.5
Vin V jn
19
1
1 e
(Vin V jn )
1
1 e
( X in X jn )
, 0, L 0
0.5
0, , L
Vin V jn
21
22
Estimating parameters
Validation
Application (Forecasting)
23
24
yni
n 1 i 1
ln( p
nN ( i )
25
ni
LL( 1 , 2, ..., K )
0 , 1 ,..., K
27
pn (i)
' X in
e ' X in e
' X jn
, pn ( j )
' X jn
e ' X in e
' X jn
LL( 1 , 2, ..., K )
N
[ yin log(
n 1
28
e
e
' X in
' X in
) (1 yin ) log(
' X jn
e
e
' X in
' X jn
' X jn
)]
max
LL( 1 , 2, ..., K )
0 , 1 ,..., K
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in the textbook to see why) the solution from the firstorder condition is the ONLY optimal solution
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term:
=1
LL N
[ yin pn (i)]xn 0 0
0 n1
Which is equivalent to:
N
[ y
in
n 1
pn (i)] 0
n 1
n 1
1
xnk
0
[ y
n 1
in
N'
yin pn (i )
n 1
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Property 2
n 1
Computational Aspects of
Maximum Likelihood
The parameters are estimated by solving a group
Learning Outcomes
What is a binary (binomial) choice situation
34
References
Chapter 4 of the text book
35
Next Class
Lab 1: use LIMDEP to estimate binary choice
models
Bring your laptop with the installed software to the
class
Lab 1 assignment will be given
36