Discrete Choice Models

William Greene
Stern School of Business
New York University
 Part 13

Latent Class Models

 Discrete Parameter Heterogeneity
Latent Classes
Discrete unobservable partition of the population
into Q classes
Discrete approximation to a continuous distribution
of parameters across individuals

Prob[β = βq | w i ] = πiq , q = 1,...,Q

exp(q w i )
πiq =
 
Q
q=1
exp(  qwi )
 Latent Class Probabilities
 Ambiguous – Classical Bayesian model?
 Equivalent to random parameters models
with discrete parameter variation
 Using nested logits, etc. does not change this
 Precisely analogous to continuous ‘random
parameter’ models
 Not always equivalent – zero inflation
models
 A Latent Class MNL Model

 Within a “class”

exp(α j + βqxitj + γj,qzit )

P[choice j | i,t, class = q] =
 exp(α j + βqxitj + γj,qzit )
J(i)
j=1

 Class sorting is probabilistic (to the analyst) determined

by individual characteristics

exp(θq w i )
P[class q | i] = = Hiq
 exp(θc w i )
Q
c=1
Two Interpretations of Latent Classes
Heterogeneity with respect to 'latent' consumer classes
Pr(choicei ) =  q=1 Pr(choicei | class = q)Pr(class = q)
Q

exp(βq x i,choice )
Pr(choicei | class = q) =
Σ j=choice exp(βq x i,choice )
exp(θq zi )
Pr(class = q | i) = Fi,q =
Σq=classes exp(θq z i )
Discrete random parameter variation
exp(βi x i,j )
Pr(choicei | βi ) =
Σ j=choice exp(βi x i,j )
exp(θq zi )
Pr(βi = βq ) = Fi,q = ,q = 1,...,Q
Σq=classes exp(θq z i )
Pr(Choicei ) =  q=1 Pr(choice | βi = β q )Pr(βi = β q )
Q
 Estimates from the LCM

 Taste parameters within each class q

 Parameters of the class probability model, θq
 For each person:
 Posterior estimates of the class they are in q|i
 Posterior estimates of their taste parameters E[q|i]
 Posterior estimates of their behavioral parameters,
elasticities, marginal effects, etc.
 Using the Latent Class Model
 Computing Posterior (individual specific) class
probabilities Pˆ H
ˆ
ˆ =
H i|q iq
(posterior)
 q=1Pˆi|qHˆ iq
q|i Q

ˆ = estimated class probability (prior)

Hiq

Pˆi|q = estimated choice probability for

the choice made, given the class

 Computing posterior (individual specific) taste

parameters
βi =  q=1H
ˆ ˆ βˆ
Q
q|i q
Application: Shoe Brand Choice
 Simulated Data: Stated Choice, 400
respondents, 8 choice situations, 3,200
observations
 3 choice/attributes + NONE
 Fashion = High / Low
 Quality = High / Low
 Price = 25/50/75,100 coded 1,2,3,4

 Heterogeneity: Sex, Age (<25, 25-39, 40+)

 Underlying data generated by a 3 class latent
class process (100, 200, 100 in classes)
 Thanks to www.statisticalinnovations.com
(Latent Gold)
 Application: Brand Choice
True underlying model is a three class LCM
NLOGIT
;lhs=choice
;choices=Brand1,Brand2,Brand3,None
;Rhs = Fash,Qual,Price,ASC4
;LCM=Male,Age25,Age39
; Pts=3
; Pds=8
; Par (Save posterior results) $
 One Class MNL Estimates
-----------------------------------------------------------
Discrete choice (multinomial logit) model
Dependent variable Choice
Log likelihood function -4158.50286
Estimation based on N = 3200, K = 4
Information Criteria: Normalization=1/N
Normalized Unnormalized
AIC 2.60156 8325.00573
Fin.Smpl.AIC 2.60157 8325.01825
Bayes IC 2.60915 8349.28935
Hannan Quinn 2.60428 8333.71185
R2=1-LogL/LogL* Log-L fncn R-sqrd R2Adj
Constants only -4391.1804 .0530 .0510
Response data are given as ind. choices
Number of obs.= 3200, skipped 0 obs
--------+--------------------------------------------------
Variable| Coefficient Standard Error b/St.Er. P[|Z|>z]
--------+--------------------------------------------------
FASH|1| 1.47890*** .06777 21.823 .0000
QUAL|1| 1.01373*** .06445 15.730 .0000
PRICE|1| -11.8023*** .80406 -14.678 .0000
ASC4|1| .03679 .07176 .513 .6082
--------+--------------------------------------------------
 Three Class LCM
Normal exit from iterations. Exit status=0.
-----------------------------------------------------------
Latent Class Logit Model
Dependent variable CHOICE
Log likelihood function -3649.13245 LogL for one class MNL = -4158.503
Restricted log likelihood -4436.14196
Chi squared [ 20 d.f.] 1574.01902 Based on the LR statistic it would
Significance level .00000 seem unambiguous to reject the one
McFadden Pseudo R-squared .1774085 class model. The degrees of freedom
Estimation based on N = 3200, K = 20 for the test are uncertain, however.
Information Criteria: Normalization=1/N
Normalized Unnormalized
AIC 2.29321 7338.26489
Fin.Smpl.AIC 2.29329 7338.52913
Bayes IC 2.33115 7459.68302
Hannan Quinn 2.30681 7381.79552
R2=1-LogL/LogL* Log-L fncn R-sqrd R2Adj
No coefficients -4436.1420 .1774 .1757
Constants only -4391.1804 .1690 .1673
At start values -4158.5428 .1225 .1207
Response data are given as ind. choices
Number of latent classes = 3
Average Class Probabilities
.506 .239 .256
LCM model with panel has 400 groups
Fixed number of obsrvs./group= 8
Number of obs.= 3200, skipped 0 obs
--------+--------------------------------------------------
 Estimated LCM: Utilities

--------+--------------------------------------------------
Variable| Coefficient Standard Error b/St.Er. P[|Z|>z]
--------+--------------------------------------------------
|Utility parameters in latent class -->> 1
FASH|1| 3.02570*** .14549 20.796 .0000
QUAL|1| -.08782 .12305 -.714 .4754
PRICE|1| -9.69638*** 1.41267 -6.864 .0000
ASC4|1| 1.28999*** .14632 8.816 .0000
|Utility parameters in latent class -->> 2
FASH|2| 1.19722*** .16169 7.404 .0000
QUAL|2| 1.11575*** .16356 6.821 .0000
PRICE|2| -13.9345*** 1.93541 -7.200 .0000
ASC4|2| -.43138** .18514 -2.330 .0198
|Utility parameters in latent class -->> 3
FASH|3| -.17168 .16725 -1.026 .3047
QUAL|3| 2.71881*** .17907 15.183 .0000
PRICE|3| -8.96483*** 1.93400 -4.635 .0000
ASC4|3| .18639 .18412 1.012 .3114
Estimated LCM: Class Probability Model
--------+--------------------------------------------------
Variable| Coefficient Standard Error b/St.Er. P[|Z|>z]
--------+--------------------------------------------------
|This is THETA(01) in class probability model.
Constant| -.90345** .37612 -2.402 .0163
_MALE|1| .64183* .36245 1.771 .0766
_AGE25|1| 2.13321*** .32096 6.646 .0000
_AGE39|1| .72630* .43511 1.669 .0951
|This is THETA(02) in class probability model.
Constant| .37636 .34812 1.081 .2796
_MALE|2| -2.76536*** .69325 -3.989 .0001
_AGE25|2| -.11946 .54936 -.217 .8279
_AGE39|2| 1.97657*** .71684 2.757 .0058
|This is THETA(03) in class probability model.
Constant| .000 ......(Fixed Parameter)......
_MALE|3| .000 ......(Fixed Parameter)......
_AGE25|3| .000 ......(Fixed Parameter)......
_AGE39|3| .000 ......(Fixed Parameter)......
--------+--------------------------------------------------
Note: ***, **, * = Significance at 1%, 5%, 10% level.
Fixed parameter ... is constrained to equal the value or
had a nonpositive st.error because of an earlier problem.
------------------------------------------------------------
 Estimated LCM:
Conditional Parameter Estimates
 Estimated LCM:
Conditional Class Probabilities
Average Estimated Class Probabilities

MATRIX ; list ; 1/400 * classp_i'1$

Matrix Result has 3 rows and 1 columns.
1
+--------------
1| .50555
2| .23853
3| .25593

This is how the data were simulated. Class

probabilities are .5, .25, .25. The model ‘worked.’
 Elasticities
+---------------------------------------------------+
| Elasticity averaged over observations.| Elasticities are computed by
| Effects on probabilities of all choices in model: | averaging individual elasticities
| * = Direct Elasticity effect of the attribute. | computed at the expected
| Attribute is PRICE in choice BRAND1 | (posterior) parameter vector.
| Mean St.Dev |
| * Choice=BRAND1 -.8010 .3381 |
This is an unlabeled choice
| Choice=BRAND2 .2732 .2994 |
| Choice=BRAND3 .2484 .2641 | experiment. It is not possible to
| Choice=NONE .2193 .2317 | attach any significance to the fact
+---------------------------------------------------+ that the elasticity is different for
| Attribute is PRICE in choice BRAND2 | Brand1 and Brand 2 or Brand 3.
| Choice=BRAND1 .3106 .2123 |
| * Choice=BRAND2 -1.1481 .4885 |
| Choice=BRAND3 .2836 .2034 |
| Choice=NONE .2682 .1848 |
+---------------------------------------------------+
| Attribute is PRICE in choice BRAND3 |
| Choice=BRAND1 .3145 .2217 |
| Choice=BRAND2 .3436 .2991 |
| * Choice=BRAND3 -.6744 .3676 |
| Choice=NONE .3019 .2187 |
+---------------------------------------------------+
Application: Long Distance Drivers’
Preference for Road Environments
 New Zealand survey, 2000, 274 drivers
 Mixed revealed and stated choice experiment
 4 Alternatives in choice set
 The current road the respondent is/has been using;
 A hypothetical 2-lane road;
 A hypothetical 4-lane road with no median;
 A hypothetical 4-lane road with a wide grass median.
 16 stated choice situations for each with 2 choice
profiles
 choices involving all 4 choices
 choices involving only the last 3 (hypothetical)

Hensher and Greene, A Latent Class Model for Discrete Choice Analysis:
Contrasts with Mixed Logit – Transportation Research B, 2003
 Attributes
 Time on the open road which is free flow (in
minutes);
 Time on the open road which is slowed by other
traffic (in minutes);
 Percentage of total time on open road spent with
other vehicles close behind (ie tailgating) (%);
 Curviness of the road (A four-level attribute -
almost straight, slight, moderate, winding);
 Running costs (in dollars);
 Toll cost (in dollars).
 Experimental Design

The four levels of the six attributes chosen are:

 Free Flow Travel Time: -20%, -10%, +10%, +20%

 Time Slowed Down: -20%, -10%, +10%, +20%
 Percent of time with vehicles close behind:
-50%, -25%, +25%, +50%
 Curviness:almost, straight, slight, moderate, winding
 Running Costs: -10%, -5%, +5%, +10%
 Toll cost for car and double for truck if trip duration is:
1 hours or less 0, 0.5, 1.5, 3
Between 1 hour and 2.5 hours 0, 1.5, 4.5, 9
More than 2.5 hours 0, 2.5, 7.5, 15
Estimated Latent Class Model
Estimated Value of Time Saved
 Distribution of Parameters –
Value of Time on 2 Lane Road
Kernel density estimate for VOT2L
.12

.10

.07
Density

.05

.02

.00
-2 0 2 4 6 8 10 12 14 16
VOT2L