Error and Generalization in Discrete Choice Under Risk

Nathaniel Wilcox

Working Papers from Chapman University, Economic Science Institute

Abstract: I compare the generalization ability, or out-of-sample predictive success, of four probabilistic models of binary discrete choice under risk. One model is the conventional homoscedastic latent index model—the simple logit—that is common in applied econometrics: This model is “context-free” in the sense that its error part is homoscedastic with respect to decision sets. The other three models are also latent index models but their error part is heteroscedastic with respect to decision sets: In that sense they are “context-dependent” models. Context-dependent models of choice under risk arise from several different theoretical perspectives. Here I consider my own “contextual utility” model (Wilcox 2011), the “decision field theory” model of Busemeyer and Townsend (1993) and the “Blavatskyy-Fishburn” model (Fishburn 1978; Blavatskyy 2014). In a new experiment, all three context-dependent models outperform the context-free model in prediction, and significantly outperform a linear probability model (suggested by contemporary applied practice a la Angrist and Pischke 2009) when the latent preference structure is rank-dependent utility (Quiggin 1982). All of this holds true for function-free estimations of outcome utilities and probability weights as well as parametric estimations. Preoccupation with theories of the deterministic structure of choice under risk, to the exclusion of theories of error, is a mistake.

Keywords: risk; discrete choice; probabilistic choice; heteroscedasticity; prediction (search for similar items in EconPapers)
JEL-codes: C25 C91 D81 (search for similar items in EconPapers)
Date: 2015
New Economics Papers: this item is included in nep-dcm, nep-ecm and nep-upt
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (12)

Downloads: (external link)
http://www.chapman.edu/research-and-institutions/e ... -wilcox-may-2015.pdf

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:chu:wpaper:15-11

Access Statistics for this paper

More papers in Working Papers from Chapman University, Economic Science Institute Contact information at EDIRC.
Bibliographic data for series maintained by Megan Luetje ().