____________________________________________________________________ He is able who thinks he is able. Buddha The Armadillo Group ,::////;::-. James Choate Austin, Tx /:'///// ``::>/|/ ravage@ssz.com www.ssz.com .', |||| `/( e\ 512-451-7087 -====~~mm-'`-```-mm --'- -------------------------------------------------------------------- ---------- Forwarded message ---------- Date: Tue, 14 Nov 2000 01:06:37 -0000 From: "Marco A. Argotte" Reply-To: psychohistory@egroups.com To: psychohistory@egroups.com Subject: [psychohistory] Daniel L. McFadden - 2000 Economics Nobel Prize Hi everyone Glad to see that we are still alive and kicking. For those that might be interested, a brief extract from the this webpage: http://nobel.sdsc.edu/announcement/2000/ecoinfoen.html { Opening material on another laureate omitted } Daniel L. McFadden Daniel McFadden's most significant contribution is his development of the economic theory and econometric methodology for analysis of discrete choice, i.e., choice among a finite set of decision alternatives. A recurring theme in McFadden's research is his ability to combine economic theory, statistical methods and empirical applications, where his ultimate goal has often been a desire to resolve social problems. Discrete Choice Analysis Microdata often reflect discrete choices. In a database, information about individuals' occupation, place of residence, or travel mode reflects the choices they have made among a limited number of alternatives. In economic theory, traditional demand analysis presupposes that individual choice be represented by a continuous variable, thereby rendering it inappropriate for studying discrete choice behavior. Prior to McFadden's prizewinning achievements, empirical studies of such choices lacked a foundation in economic theory. McFadden's Contributions McFadden's theory of discrete choice emanates from microeconomic theory, according to which each individual chooses a specific alternative that maximizes his utility. However, as the researcher cannot observe all the factors affecting individual choices, he perceives a random variation across individuals with the same observed characteristics. On the basis of his new theory, McFadden developed microeconometric models that can be used, for example, to predict the share of a population that will choose different alternatives. McFadden's seminal contribution is his development of so-called conditional logit analysis in 1974. In order to describe this model, suppose that each individual in a population faces a number (say, J) of alternatives. Let X denote the characteristics associated with each alternative and Z the characteristics of the individuals that the researcher can observe in his data. In a study of the choice of travel mode, for instance, where the alternatives may be car, bus or subway, X would then include information about time and costs, while Z might cover data on age, income and education. But differences among individuals and alternatives other than X and Z, although unobservable to the researcher, also determine an individual's utility-maximizing choice. Such characteristics are represented by random "error terms". McFadden assumed that these random errors have a specific statistical distribution (termed an extreme value distribution) in the population. Under these conditions (plus some technical assumptions), he demonstrated that the probability that individual i will choose alternative j can be written as: { Formula omitted } In this so-called multinomial logit model, e is the base of the natural logarithm, while ... and ... are (vectors of) parameters. In his database, the researcher can observe the variables X and Z, as well as the alternative the individual in fact chooses. As a result, he is able to estimate the parameters and using well-known statistical methods. Even though logit models had been around for some time, McFadden's derivation of the model was entirely new and was immediately recognized as a fundamental breakthrough. Such models are highly useful and are routinely applied in studies of urban travel demand. They can thus be used in traffic planning to examine the effects of policy measures as well as other social and/or environmental changes. For example, these models can explain how changes in price, improved accessibility or shifts in the demographic composition of the population affect the shares of travel using alternative means of transportation. The models are also relevant in numerous other areas, such as in studies of the choice of dwelling, place of residence, and education. McFadden has applied his own methods to analyze a number of social issues, such as the demand for residential energy, telephone services and housing for the elderly. Methodological Elaboration Conditional logit models have the peculiar property that the relative probabilities of choosing between two alternatives, say, travel by bus or car, are independent of the price and quality of other transportation options. This property - called independence of irrelevant alternatives (IIA) - is unrealistic in certain applications. McFadden not only devised statistical tests to ascertain whether IIA is satisfied, but also introduced more general models, such as the so-called nested logit model. Here, it is assumed that individuals' choices can be ordered in a specific sequence. For instance, when studying decisions regarding place of residence and type of housing, an individual is assumed to begin by choosing the location and then the type of dwelling. Even with these generalizations, the models are sensitive to the specific assumptions about the distribution of unobserved characteristics in the population. Over the last decade, McFadden has elaborated on simulation models (the method of simulated moments) for statistical estimation of discrete choice models allowing much more general assumptions. Increasingly powerful computers have enhanced the practical applicability of these numerical methods. As a result, individuals' discrete choices can now be portrayed with greater realism and their decisions predicted more accurately. { Ending bit omitted } **** -------------------------- eGroups Sponsor -------------------------~-~> Create your business web site your way now at Bigstep.com. It's the fast, easy way to get online, to promote your business, and to sell your products and services. 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