Implications of Thresholds in Discrete Choice Modelling

Abstract Individual choices are affected by complex factors and the challenge consists of how to incorporate these factors in order to improve the realism of the modelling work. The presence of limits, cut‐offs or thresholds in the perception and appraisal of both attributes and alternatives is part of the complexity inherent to choice‐making behaviour. The paper considers the existence of thresholds in three contexts: inertia (habit or reluctance to change), minimum perceptible changes in attribute values, and as a mechanism for accepting or rejecting alternatives. It discusses the more relevant approaches in modelling these types of thresholds and analyses their implications in model estimation and forecasting using both synthetic and real databanks. It is clear from the analysis that if thresholds exist but are not considered, the estimated models will be biased and may produce significant errors in prediction. Fortunately, there are practical methods to attack this problem and some are demonstrated.

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