Question

limitataions of linear probability​

Answer 1

I think a lot about predicting/forecasting binary outcomes. Will the economy head into a recession next year? What’s the likelihood of a loan defaulting over the next few years? Will my followers on social media abandon me if I tweet about my lunch?

One often maligned, but seemingly irresitable approach to modeling binary ourcomes is the Linear Probability Model (LPM). As is known going back to before I was born, the Linear Probability Model has some issues. In particular, it is biased and inconsistent. But is it all that bad? Let’s take a look.

Here are a couple of handy references.