Edited by Stephane Hess and Andrew Daly
Chapter 14: Latent class structures: taste heterogeneity and beyond
The treatment of heterogeneity across individual decision makers is one of the key topics of research in choice modelling, as evidenced by many of the chapters in this book. While part of this heterogeneity can in many cases be linked to differences in key socio-demographic characteristics across agents, there has long been a recognition that often a non-trivial share of it cannot be explained in this manner. A number of reasons exist, on the one hand an inability to capture all possible socio-demographic characteristics that may be relevant, and on the other hand the existence of idiosyncratic differences in preferences across decision makers. Limiting ourselves to a purely deterministic treatment of taste heterogeneity can result in a loss of explanatory power, a lack of insights into the true extent of preference heterogeneity, and, depending on the shape and extent of the omitted heterogeneity, potential bias in key model outputs. With the significant increase in performance of personal computers and the availability of easy to use software, a majority of academic studies as well as a large share of applied work now allow for some degree of random preference heterogeneity in their models. The key principle in any model aiming to capture random heterogeneity is to allow for a distribution in sensitivities across decision makers. Two main approaches exist, making use of either a discrete or a continuous distribution.
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