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Predicting binary outcomes

Graham Elliott () and Robert Lieli

Journal of Econometrics, 2013, vol. 174, issue 1, 15-26

Abstract: We address the issue of using a set of covariates to categorize or predict a binary outcome. This is a common problem in many disciplines including economics. In the context of a prespecified utility (or cost) function we examine the construction of forecasts suggesting an extension of the Manski (1975, 1985) maximum score approach. We provide analytical properties of the method and compare it to more common approaches such as forecasts or classifications based on conditional probability models. Large gains over existing methods can be attained when models are misspecified.

Date: 2013
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Handle: RePEc:eee:econom:v:174:y:2013:i:1:p:15-26