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  • MOOC Econometrics: Training Exercise 5.4

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    Alberto Aracén Duran
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    This document discusses using a logit model for forecasting binary outcomes and selecting a cutoff value to maximize the expected hit rate. (1) A researcher constructed a logit model and wants to use it to forecast probabilities (p̂i) for new binary outcome values (yi) and select a cutoff value (c) to transform the probabilities into 0/1 predictions. (2) The payoff matrix shows that correctly predicting 0 or 1 yields a payoff of 1, while incorrect predictions yield 0. (3) To maximize the expected payoff, the cutoff value (c) should be selected such that the expected payoff for predicting 1 equals the expected payoff for predicting 0.

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    TrainExer 5-4

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    This document discusses using a logit model for forecasting binary outcomes and selecting a cutoff value to maximize the expected hit rate. (1) A researcher constructed a logit model and wants to use it to forecast probabilities (p̂i) for new binary outcome values (yi) and select a cutoff value (c) to transform the probabilities into 0/1 predictions. (2) The payoff matrix shows that correctly predicting 0 or 1 yields a payoff of 1, while incorrect predictions yield 0. (3) To maximize the expected payoff, the cutoff value (c) should be selected such that the expected payoff for predicting 1 equals the expected payoff for predicting 0.

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    12 views1 page

    MOOC Econometrics: Training Exercise 5.4

    Uploaded by

    Alberto Aracén Duran
    This document discusses using a logit model for forecasting binary outcomes and selecting a cutoff value to maximize the expected hit rate. (1) A researcher constructed a logit model and wants to use it to forecast probabilities (p̂i) for new binary outcome values (yi) and select a cutoff value (c) to transform the probabilities into 0/1 predictions. (2) The payoff matrix shows that correctly predicting 0 or 1 yields a payoff of 1, while incorrect predictions yield 0. (3) To maximize the expected payoff, the cutoff value (c) should be selected such that the expected payoff for predicting 1 equals the expected payoff for predicting 0.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
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    MOOC Econometrics

    Training Exercise 5.4

    Questions
    A researcher constructed a logit model for a binary dependent variable yi and (s)he wants to use this model for
    forecasting. Assume that the logit model is the true model and that the used sample is large enough to ensure that
    the estimated parameters correspond to their true value.
    (S)he constructs forecasted probabilities denoted by pi for m new values of yi and wants to transform these
    values to 0/1 predictions using a cut-off value c. In this exercise we are going to derive which value of c the
    researcher has to choose to maximize the expected hit rate.
    Consider the following pay-off matrix for the four situations that can occur:
    predicted
    observed y = 0 y = 1
    y =0 1 0
    y =1 0 1
    When the researcher predicts a one (zero) and the true value of y is zero (one) the pay-off is 0. When (s)he predicts
    a one or zero and the prediction is correct, the pay-off is 1.
    (a) What is the expected pay-off in case the researcher predicts a one? (Hint. The true value y is a one with
    probability pi )

    (b) What is the expected pay-off in case the researcher predicts a zero?

    (c) Use the results in (a) and (b) to derive the optimal threshold to predict a one.

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