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A Bookmaker or Market Type Test for Specification in Discrete Choice Models

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  • John J. Beggs

Abstract

This paper suggests that the predicted probabilities of outcomes given by an estimated discrete choice model by thought of as prices (or bookmaker odds) associated with those outcomes. By buying or selling contracts (gambling) at those prices (odds) it should not be possible to, on average, make a profit if the model is well specified and is generating "correct" prices. This notion then forms the basis of a model specification test.

Suggested Citation

  • John J. Beggs, 1982. "A Bookmaker or Market Type Test for Specification in Discrete Choice Models," Cowles Foundation Discussion Papers 636, Cowles Foundation for Research in Economics, Yale University.
    • Handle: RePEc:cwl:cwldpp:636
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    File URL: https://cowles.yale.edu/sites/default/files/files/pub/d06/d0636.pdf
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    References listed on IDEAS

    as
    1. Hausman, Jerry & McFadden, Daniel, 1984. "Specification Tests for the Multinomial Logit Model," Econometrica, Econometric Society, vol. 52(5), pages 1219-1240, September.
    2. Hausman, Jerry, 2015. "Specification tests in econometrics," Applied Econometrics, Russian Presidential Academy of National Economy and Public Administration (RANEPA), vol. 38(2), pages 112-134.
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