MODELLING

MULTINOMIAL
CHOICE

Truong Dang Thuy

thuy.truong@ueh.edu.vn
  Multinomial choice
 Modelling multinomial choice
OUTLINE  Empirical studies with Multinomial Logistic
Regression
 Illustration with data
MULTINOMIAL
CHOICE
AND RANDOM UTILITY THEORY
 MULTINOMIAL
CHOICE ▪ In many cases, the choice involves more than two alternatives
 Choice of transportation means going to school: bus, motorbike,
bicycle, walking…
 Choice of smartphone brands: Samsung, Apple, Huawei…
 Choice of universities/Colleges

▪ The choice between  …

more than two ▪ These are choice between more than two alternatives.
alternatives
▪ How do consumer make the decision?
 THEORY OF
INDIVIDUAL ▪ Similar to binary choice, when facing a choice between
alternatives, people will choose the alternative that maximizes
CHOICE their utility
▪ For examples:
 Alternative 1 generates utility 𝑈1
 Alternative 2 generates utility 𝑈2

▪ People will choose the  …

course of actions that  Alternative 𝐽 generates utility 𝑈𝐽
maximize their utility
▪ People will choose alternative 𝑗 if
𝑈𝑗 > 𝑈𝑙 ∀𝑙 ≠ 𝑗
RANDOM UTILITY
THEORY ▪ Utility is assumed to have two components
𝑢𝑗 = 𝑉𝑗 + 𝜀𝑗
▪ If the systemmatic part is assumed to be a linear function of
attributes, the utility function from alternative 𝑗 becomes
𝑢𝑗 = 𝛽𝑋𝑗 + 𝜀𝑗

▪ Components of the for 𝑗 = 1, … , 𝐽.

utility function ▪ 𝑋𝑗 is attribute levels of alternative 𝑗
▪ 𝛽 is the marginal utility
 RANDOM UTILITY ▪ 𝑝𝑗 = Pr j is chosen among C

THEORY where 𝐶 is the set of all alternatives.

▪ 𝑝𝑗 = Pr 𝑈𝑗 > 𝑈𝑙 , ∀𝑙 ≠ 𝑗, j,l ∈ 𝐶
▪ 𝑝𝑗 = Pr 𝑈𝑗 > max 𝑈𝑙 = Pr 𝑈𝑗 > 𝑈 ∗
𝑙∈𝐶− 𝑗

▪ 𝑝𝑗 = Pr 𝑉𝑗 + 𝜀𝑗 > 𝑉 ∗ + 𝜀 ∗ = Pr 𝜀 ∗ − 𝜀𝑗 < 𝑉𝑗 − 𝑉 ∗
1
▪ 𝑝𝑗 = 𝜇 𝑉∗ −𝑉𝑗
▪ The probability of 1+𝑒
choosing alternative j using Gumbel property 3 saying that 𝜀 ∗ − 𝜀𝑗 is logistically distributed
▪ The probability of choosing alternative 𝑗 is then
𝑒 𝑉𝑗
𝑝𝑗 =
σ𝐽𝑙=1 𝑒 𝑉𝑙
MODELLING
MULTINOMIAL
CHOICE
 MODELLING
MULTINOMIAL ▪ Suppose a decision maker has to make choice between 𝐽 + 1
CHOICE alternatives (outcomes): 𝑌 = 0,1,2, … , 𝐽
▪ Each alternative generates a corresponding level of utility
𝑢𝑗 = 𝑉𝑗 + 𝜀𝑗
▪ Apply the Random Utility Theory, we have the probability of
choosing alternative 𝑗 to be
▪ The general setting 𝑒 𝑉𝑗
𝑝𝑗 =
σ𝐽𝑙=1 𝑒 𝑉𝑙
 ▪ If we assume 𝑉𝑗 to be a linear function of individual
MODELLING characteristics 𝑋, the probability becomes
MULTINOMIAL
𝑒 𝑋𝛽𝑗
CHOICE 𝑝𝑗 =
σ𝐽𝑙=1 𝑒 𝑋𝛽𝑙
▪ Given this probability equation, utility of one alternative must
be fixed. Why?
▪ Let’s fix 𝑉𝐽 = 0, so

𝑒 𝑋𝛽𝑗
▪ the probabilities 𝑝𝑗 = 𝐽−1
1 + σ𝑙=1 𝑒 𝑋𝛽𝑙
1
𝑝0 = 𝐽−1
1 + σ𝑙=1 𝑒 𝑋𝛽𝑙
▪ This is exactly the Multinomial Logit Model.
 ▪ Given the choice variable with 𝐽 outcomes: 𝑌 = 1,2, … , 𝐽
MULTINOMIAL ▪ The corresponding probabilities of choosing these outcomes
LOGIT MODEL are 𝑝1 ,..., 𝑝𝐽
▪ Let’s choose 𝐽 as the base outcome (category)
▪ The logits (log-odd ratios)
𝑝1
log = 𝛽1 𝑋
𝑝𝐽
▪ we model log-odd 𝑝2
ratios as linear log = 𝛽2 𝑋
functions of individual 𝑝𝐽
characteristics …
𝑝𝐽
log = 0
𝑝𝐽
 ▪ In general
𝑝𝑗
MULTINOMIAL log = 𝛽𝑗 𝑋
𝑝0
LOGIT MODEL ▪ Exponentiate both sides
𝑝𝑗 = 𝑝0 ∙ 𝑒 𝛽𝑗 𝑋
▪ Because the sum of all probabilities must be 1
𝐽

▪ Given the functional 𝑝0 = 1 − ෍ 𝑝𝑗

form for log-odd ratios, 1
we recover the ▪ Substitute 𝑝𝑗 = 𝑝0 ∙ 𝑒 𝛽𝑗 𝑋 into the above to yield
probabilities
𝐽

𝑝0 = 1 − ෍ 𝑝0 ∙ 𝑒 𝛽𝑗 𝑋
1
 MULTINOMIAL
LOGIT MODEL
▪ With some transformation we get
1
𝑝0 = 𝐽
1 + σ1 𝑒 𝛽𝑗 𝑋
▪ Now using 𝑝𝑗 = 𝑝0 ∙ 𝑒 𝛽𝑗 𝑋 again to recover all the probabilities
▪ from the log-odd
functions, we now 𝑒 𝛽𝑗 𝑋
𝑝𝑗 =
recover the probability 𝐽
1 + σ1 𝑒 𝛽𝑗 𝑋
functions
 ▪ Gven data of 𝑌 and 𝑋, the coefficients 𝛽 is estimated by
MULTINOMIAL maximizing the log-likelihood function
LOGIT MODEL 𝑁 𝐽

log 𝐿 = ෍ ෍ 𝑌𝑖𝑗 ln 𝑝𝑖𝑗

𝑖=1 𝑗=1

▪ where
𝑒 𝛽𝑗 𝑋
▪ The MNL model is 𝑝𝑗 = 𝐽
1 + σ1 𝑒 𝛽𝑗 𝑋
estimated by the
Maximum Likelihood ▪ The utility functions are thus estimated for all alternatives
Estimation Method
𝑢𝑗 = 𝛽𝑗 𝑋 + 𝜀𝑗
except for the alternative 𝐽, which is called the base
category/outcome.
 MULTINOMIAL
LOGIT MODEL
▪ Given the log-odd
𝑝1
log = 𝛽1 𝑋
𝑝𝐽
𝑝1
▪ when 𝛽1 = 0, 𝑋 does not affect the ratio
𝑝𝐽
𝑝1
▪ interpretation of the ▪ if 𝛽1 > 0, increase in 𝑋 results in an increase in the ratio
𝑝𝐽
coefficients in MNL
model
𝑝1
▪ if 𝛽1 < 0, increase in 𝑋 results in a decrease in the ratio
𝑝𝐽
EMPIRICAL STUDIES WITH
MULTINOMIAL CHOICE
Thrane (2015) Examining tourists' long-distance transportation
mode choices using a Multinomial Logit regression model.
Tourism Management Perspective 15: 115-121.
 Thrane (2015) ▪ Research objective: examining the choice of transportation
mode of tourists
▪ Dependent variable 𝑦 includes private car (base), air
transportation, public transportation.
▪ Independent variables:
• What drives consumer ▪ distance
demand for packaged
rice? Evidence from South
▪ time
and Southeast Asia ▪ trip characteristics: length of stay, trip purpose,
companion…
 Thrane (2015)

• Summary statistics
 Thrane (2015)

• Coefficients MNL
regression
 Thrane (2015)

• Coefficients MNL
regression
 Thrane (2015)

• The paper did not

calculate the marginal
effects, but presented
the predicted
probabilities
ANALYSIS OF
MULTINOMIAL CHOICE:
ILLUSTRATION WITH DATA
 ▪ Depvar: platform =lotuspink, Shoppio, ZALODA
▪ fpurchase: frequency of online purchase
(times/month)
EXAMPLE DATA
▪ basket: basket value (thousand VND)
▪ experience: online shopping experience
▪ male: 1 = male, 0 otherwise
▪ region: 1 if urban, 0 otherwise
• The choice of online
shopping platform ▪ occupation:
• More info on the data ▪ “unemployed”: unemployed
is here. ▪ “general”: general labor
▪ “skilled”: skilled worker
▪ general and skill are dummy variables generated
from occupation.
 IMPORT DATA

• and summary statistics

 MNL
REGRESSION

• set the base first,

• then estimate using
nnet::multinom()
IMPORT DATA
 MNL
REGRESSION

• re-arranged
 MARGINAL
EFFECTS

• average marginal
effects after MNL
regression
 PREDICTED
PROBABILITY

• at different values of
basket, from 0 to 1000
 PLOT THE
PREDICTED
PROBABILITIES

• on basket value
 LOGISTIC
REGRESSION