Thursday, July 30, 2015

Random utility discrete choice models, partition functions and information theory

Noah Smith mentions random utility discrete choice models again, this time at Bloomberg View
These models, which are used to predict consumer choices in a huge variety of situations, have been so accurate and successful that they are regularly cited as the canonical example of "economics that works."
As I pointed out in a comment awhile ago on his blog, there is a lot of overlap between the approach and the partition function approach to the information transfer model. In fact, one can see the information transfer macro model as a specific choice of the utility function that is proportional to log M (where M is a measure of the money supply). Entropy maximization (partition function) and utility maximization aren't necessarily completely at odds -- the differences are described in this post.

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