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Random Forest Estimation of the Ordered Choice Model

Author

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  • Lechner, Michael
  • Okasa, Gabriel
Abstract
In econometrics so-called ordered choice models are popular when interest is in the estimation of the probabilities of particular values of categorical outcome variables with an inherent ordering, conditional on covariates. In this paper we develop a new machine learning estimator based on the random forest algorithm for such models without imposing any distributional assumptions. The proposed Ordered Forest estimator provides a flexible estimation method of the conditional choice probabilities that can naturally deal with nonlinearities in the data, while taking the ordering information explicitly into account. In addition to common machine learning estimators, it enables the estimation of marginal effects as well as conducting inference thereof and thus providing the same output as classical econometric estimators based on ordered logit or probit models. An extensive simulation study examines the finite sample properties of the Ordered Forest and reveals its good predictive performance, particularly in settings with multicollinearity among the predictors and nonlinear functional forms. An empirical application further illustrates the estimation of the marginal effects and their standard errors and demonstrates the advantages of the flexible estimation compared to a parametric benchmark model.

Suggested Citation

  • Lechner, Michael & Okasa, Gabriel, 2019. "Random Forest Estimation of the Ordered Choice Model," Economics Working Paper Series 1908, University of St. Gallen, School of Economics and Political Science.
    • Handle: RePEc:usg:econwp:2019:08
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    References listed on IDEAS

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    Cited by:

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    3. Daniel Goller & Sandro Heiniger, 2024. "A general framework to quantify the event importance in multi-event contests," Annals of Operations Research, Springer, vol. 341(1), pages 71-93, October.
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    5. Wang, Shixuan & Syntetos, Aris A. & Liu, Ying & Di Cairano-Gilfedder, Carla & Naim, Mohamed M., 2023. "Improving automotive garage operations by categorical forecasts using a large number of variables," European Journal of Operational Research, Elsevier, vol. 306(2), pages 893-908.
    6. Riccardo Di Francesco, 2023. "Ordered Correlation Forest," Papers 2309.08755, arXiv.org.

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    More about this item

    Keywords

    Ordered choice models; random forests; probabilities; marginal effects; machine learning;
    All these keywords.

    JEL classification:

    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
    • C25 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Discrete Regression and Qualitative Choice Models; Discrete Regressors; Proportions; Probabilities
    • C40 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - General

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