Tutorial: Stochastic Choice

This tutorial covers stochastic choice models: random utility models, IIA testing, and regularity conditions.

Topics covered:

Random utility models (logit, Luce)
Independence of Irrelevant Alternatives (IIA)
Regularity conditions
Model diagnostics

Prerequisites

Python 3.10+
Completed Tutorial 2: Menu-Based Choice
Basic econometrics knowledge (for stochastic models)

Note

This tutorial covers Chapter 13 (Stochastic Choice) of Chambers & Echenique (2016).

The Data (StochasticChoiceLog)

A StochasticChoiceLog stores probabilistic choice data: the same menu presented multiple times, with potentially different choices each time.

from prefgraph import StochasticChoiceLog

# A menu presented 100 times with observed choice frequencies
log = StochasticChoiceLog(
    menus=[
        frozenset({0, 1, 2}),  # Menu 1: items 0, 1, 2
        frozenset({0, 1}),     # Menu 2: items 0, 1
        frozenset({1, 2}),     # Menu 3: items 1, 2
    ],
    choice_frequencies=[
        {0: 60, 1: 30, 2: 10},  # Menu 1: 60% chose 0, 30% chose 1, 10% chose 2
        {0: 70, 1: 30},         # Menu 2: 70% chose 0
        {1: 55, 2: 45},         # Menu 3: 55% chose 1
    ],
    item_labels=["Apple", "Banana", "Cherry"],
)

print(f"Number of menus: {log.num_menus}")
print(f"Unique items: {log.num_items}")

# Get choice probability
p_apple_menu1 = log.get_choice_probability(0, 0)
print(f"P(Apple | Menu 1) = {p_apple_menu1:.2f}")

Output:

Number of menus: 3
Unique items: 3
P(Apple | Menu 1) = 0.60

From Repeated Choices

Create from deterministic repeated observations:

# Same menu observed 10 times with different choices
menus = [frozenset({0, 1, 2})] * 10
choices = [0, 0, 0, 1, 0, 0, 2, 0, 1, 0]  # 6 chose 0, 2 chose 1, 2 chose 2

log = StochasticChoiceLog.from_repeated_choices(menus, choices)
print(log.get_choice_probabilities(0))  # {0: 0.6, 1: 0.2, 2: 0.2}

Random Utility Models

The random utility model (RUM) assumes:

\[U_i = V_i + \epsilon_i\]

where \(V_i\) is deterministic utility and \(\epsilon_i\) is random. The consumer chooses the item with highest total utility.

Different assumptions about \(\epsilon\) lead to different models:

Random Utility Models
Model	Error Distribution	Key Property
Logit	Gumbel (Type I Extreme Value)	IIA holds
Probit	Multivariate Normal	Flexible substitution
Luce	Implicit (ratio model)	IIA holds

Fitting a Logit Model

from prefgraph import fit_random_utility_model

# Fit logit model to stochastic choice data
result = fit_random_utility_model(
    log,
    model_type="logit",
    max_iterations=1000,
)

print(f"Model type: {result.model_type}")
print(f"Estimated utilities: {result.parameters}")
print(f"Log-likelihood: {result.log_likelihood:.2f}")
print(f"AIC: {result.aic:.2f}")
print(f"BIC: {result.bic:.2f}")
print(f"Satisfies IIA: {result.satisfies_iia}")

Output:

Model type: logit
Estimated utilities: {'scale': 1.0, 'convergence': 1.0}
Log-likelihood: -89.34
AIC: 184.68
BIC: 190.12
Satisfies IIA: True

Full Summary Report

print(result.summary())

================================================================================
                         STOCHASTIC CHOICE MODEL REPORT
================================================================================

Status: RUM VIOLATIONS
Model Type: logit

Model Fit:
---------
  Log-Likelihood ............... -222.2062
  AIC ........................... 450.4125
  BIC ........................... 461.5238
  Satisfies IIA ....................... No
  Regularity Violations ................ 0

Model Parameters:
----------------
  scale: 1.0000
  convergence: 1.0000

Interpretation:
--------------
  IIA violated - choice probabilities context-dependent.

Computation Time: 1.70 ms
================================================================================

Predicting Choice Probabilities

from prefgraph import estimate_choice_probabilities

# Get predicted probabilities from fitted utilities
utilities = result.choice_probabilities[:3]  # First 3 items
print(f"Predicted choice probabilities: {utilities}")

Output:

Predicted choice probabilities: [0.6 0.3 0.1]

Testing McFadden Axioms

McFadden’s axioms characterize random utility maximization:

Regularity: \(P(x|A) \geq P(x|B)\) when \(A \subseteq B\) (removing alternatives shouldn’t decrease choice probability)
IIA: \(\frac{P(x|A)}{P(y|A)} = \frac{P(x|B)}{P(y|B)}\) (relative odds are constant across menus)

from prefgraph import test_mcfadden_axioms

axiom_results = test_mcfadden_axioms(log)

print(f"Satisfies IIA: {axiom_results['satisfies_iia']}")
print(f"Satisfies regularity: {axiom_results['satisfies_regularity']}")
print(f"RUM consistent: {axiom_results['is_rum_consistent']}")

if not axiom_results['satisfies_regularity']:
    print(f"Regularity violations: {axiom_results['regularity_violations']}")

Output:

Satisfies IIA: False
Satisfies regularity: True
RUM consistent: False

Regularity Axiom Testing

The regularity axiom is a fundamental property of random utility models. It states that adding options to a menu should never increase the probability of choosing any particular item:

\[\text{For all } A \subseteq B \text{ and } x \in A: \quad P(x|A) \geq P(x|B)\]

Intuition: if you choose pizza 60% of the time from {pizza, burger}, adding salad shouldn’t make you choose pizza more often. If it does, something beyond simple utility maximization is at play.

from prefgraph import test_regularity

result = test_regularity(stochastic_log, tolerance=0.01)

if result.satisfies_regularity:
    print("No decoy/context effects detected")
else:
    print(f"Violations: {len(result.violations)}")
    print(f"Violation rate: {result.violation_rate:.1%}")
    if result.worst_violation:
        v = result.worst_violation
        print(f"Worst: item {v.item}, P increased by {v.magnitude:.2%}")

Output:

Violations: 2
Violation rate: 8.3%
Worst: item 0, P increased by 5.2%

What Violations Mean

Regularity violations indicate that choice probabilities are context-dependent:

Causes of Regularity Violations
Cause	Description
Decoy effect	An inferior option makes a similar option look better
Attraction effect	Adding a dominated alternative boosts the dominant one
Compromise effect	Middle options gain share when extremes are added
Consideration sets	Larger menus change which items are noticed

Detailed Violation Analysis

The result includes detailed information about each violation:

for v in result.violations[:3]:
    print(f"Item {v.item}:")
    print(f"  Smaller menu (idx {v.subset_menu_idx}): P = {v.prob_in_subset:.2%}")
    print(f"  Larger menu (idx {v.superset_menu_idx}): P = {v.prob_in_superset:.2%}")
    print(f"  Increase: {v.magnitude:.2%}")

Output:

Item 0:
  Smaller menu (idx 1): P = 55.0%
  Larger menu (idx 0): P = 60.2%
  Increase: 5.2%

Item 1:
  Smaller menu (idx 2): P = 48.0%
  Larger menu (idx 0): P = 50.5%
  Increase: 2.5%

Full Summary Report

print(result.summary())

================================================================================
                           REGULARITY TEST REPORT
================================================================================

Status: VIOLATIONS DETECTED

Metrics:
-------
  Satisfies Regularity ................. No
  Number of Violations .................. 2
  Testable Pairs ........................ 24
  Violation Rate ..................... 8.3%

Worst Violation:
---------------
  Item ................................... 0
  P(smaller menu) ................... 55.0%
  P(larger menu) .................... 60.2%
  Magnitude .......................... 5.2%

Interpretation:
--------------
  Regularity violations suggest context-dependent choice.
  This could indicate decoy effects, attraction effects, or
  consideration set changes. Standard logit may be inappropriate.

Computation Time: 0.85 ms
================================================================================

When to Use This Test

Use regularity testing when:

Validating RUM assumptions - Regularity is necessary for random utility
Detecting context effects - Decoy effects violate regularity
A/B testing analysis - Adding options shouldn’t boost existing ones
Menu design - Understanding how options affect each other

Testing IIA (Independence of Irrelevant Alternatives)

The IIA property is tested by checking if relative odds are stable:

from prefgraph import check_independence_irrelevant_alternatives

satisfies_iia = check_independence_irrelevant_alternatives(
    log,
    tolerance=0.1,  # Allow 10% coefficient of variation
)

print(f"IIA holds: {satisfies_iia}")

Output:

IIA holds: False

The Red Bus / Blue Bus Problem

A famous example where IIA fails:

# Without blue bus: P(car) = P(red bus) = 0.5
# With blue bus: if IIA holds, P(car) = P(red bus) = P(blue bus) = 0.33
# But blue bus should steal mainly from red bus, not car!

log_without_blue = StochasticChoiceLog(
    menus=[frozenset({0, 1})],  # car, red bus
    choice_frequencies=[{0: 50, 1: 50}],
    item_labels=["Car", "Red Bus"],
)

log_with_blue = StochasticChoiceLog(
    menus=[frozenset({0, 1, 2})],  # car, red bus, blue bus
    choice_frequencies=[{0: 50, 1: 25, 2: 25}],  # Realistic: blue steals from red
    item_labels=["Car", "Red Bus", "Blue Bus"],
)

# This violates IIA: P(car)/P(red) changed from 1.0 to 2.0
print("Without blue bus: P(car)/P(red bus) = 1.0")
print("With blue bus: P(car)/P(red bus) = 2.0")
print("IIA violated!")

Output:

Without blue bus: P(car)/P(red bus) = 1.0
With blue bus: P(car)/P(red bus) = 2.0
IIA violated!

Application: A/B Testing for Product Features

Analyze a recommendation system’s click data:

import numpy as np
from prefgraph import (
    StochasticChoiceLog,
    fit_random_utility_model,
    test_mcfadden_axioms,
)

np.random.seed(42)

# Simulate click data: 5 items, various recommendation slates
n_items = 5
item_labels = ["News", "Sports", "Tech", "Entertainment", "Science"]

# True utilities (unknown to us, we'll try to recover)
true_utilities = np.array([2.0, 1.5, 1.0, 1.8, 0.8])

# Generate stochastic choice data
menus = []
frequencies = []

# Create different recommendation slates
for slate_size in [2, 3, 4]:
    for _ in range(5):
        # Random slate
        slate_items = np.random.choice(n_items, size=slate_size, replace=False)
        menu = frozenset(slate_items.tolist())

        # Simulate 100 users seeing this slate
        n_users = 100
        freq = {item: 0 for item in menu}

        for _ in range(n_users):
            # Logit choice probabilities
            u_slate = true_utilities[list(menu)]
            probs = np.exp(u_slate) / np.sum(np.exp(u_slate))
            choice = np.random.choice(list(menu), p=probs)
            freq[choice] += 1

        menus.append(menu)
        frequencies.append(freq)

log = StochasticChoiceLog(
    menus=menus,
    choice_frequencies=frequencies,
    item_labels=item_labels,
)

# Analyze the data
print("=== Stochastic Choice Analysis ===")
print(f"Menus observed: {log.num_menus}")
print(f"Items: {item_labels}")
print()

# Test McFadden axioms
axioms = test_mcfadden_axioms(log)
print(f"IIA satisfied: {axioms['satisfies_iia']}")
print(f"Regularity satisfied: {axioms['satisfies_regularity']}")
print(f"RUM consistent: {axioms['is_rum_consistent']}")
print()

# Fit logit model
result = fit_random_utility_model(log, model_type="logit")
print(f"Log-likelihood: {result.log_likelihood:.2f}")
print(f"AIC: {result.aic:.2f}")
print()

# Compare estimated vs true utilities
print("Utility Comparison:")
print("Item            True    Estimated")
for i, label in enumerate(item_labels):
    estimated = result.choice_probabilities[i] if i < len(result.choice_probabilities) else 0
    print(f"{label:15} {true_utilities[i]:.2f}    {estimated:.2f}")

At Scale: A/B Testing for Product Features

This example simulates realistic A/B test data for product feature preferences, including context effects and IIA violations from similar alternatives:

import numpy as np
from prefgraph import (
    StochasticChoiceLog,
    fit_random_utility_model,
    test_mcfadden_axioms,
    check_independence_irrelevant_alternatives,
)

np.random.seed(42)

# A/B test configuration: testing 6 product variants
n_items = 6
n_menus = 15   # Different test conditions
n_obs_per_menu = 500  # Users per condition (total: 7,500 observations)

item_labels = [
    "Basic",      # Entry-level product
    "Premium",    # High-end product
    "Premium+",   # Premium variant (similar to Premium - IIA violation)
    "Budget",     # Low-cost option
    "Pro",        # Professional tier
    "Enterprise", # Business tier
]

# True underlying utilities (latent)
# Premium and Premium+ are similar, causing IIA violations
base_utilities = np.array([1.5, 2.5, 2.4, 1.0, 2.2, 2.0])

# Similarity matrix: similar products cannibalize each other
# Premium and Premium+ are very similar (high substitutability)
similarity = np.zeros((n_items, n_items))
similarity[1, 2] = similarity[2, 1] = 0.8  # Premium ~ Premium+
similarity[4, 5] = similarity[5, 4] = 0.5  # Pro ~ Enterprise

menus = []
frequencies = []
menu_descriptions = []

# Design various test conditions
test_conditions = [
    # Binary comparisons
    ([0, 1], "Basic vs Premium"),
    ([0, 3], "Basic vs Budget"),
    ([1, 4], "Premium vs Pro"),
    # Triplets
    ([0, 1, 3], "Entry-level options"),
    ([1, 4, 5], "Premium tiers"),
    # Adding similar alternative (IIA test)
    ([0, 1], "Basic vs Premium (control)"),
    ([0, 1, 2], "Basic vs Premium vs Premium+"),  # IIA violation expected
    # Full product line
    ([0, 1, 3, 4], "Main product line"),
    ([0, 1, 2, 3, 4, 5], "All products"),
    # Targeted tests
    ([1, 2], "Premium variants only"),
    ([4, 5], "Business tiers only"),
    ([0, 1, 4], "Consumer vs Pro"),
    ([3, 0, 1], "Budget to Premium path"),
    ([1, 2, 4, 5], "Premium + Business"),
    ([0, 3, 4], "Budget-conscious options"),
]

for menu_items, description in test_conditions:
    menu = frozenset(menu_items)
    menus.append(menu)
    menu_descriptions.append(description)

    # Calculate choice probabilities with context effects
    items = list(menu)
    utilities = base_utilities[items].copy()

    # Context effect: similar products split demand
    for i, item_i in enumerate(items):
        for j, item_j in enumerate(items):
            if i != j and similarity[item_i, item_j] > 0:
                # Reduce utility when similar alternative present
                utilities[i] -= 0.3 * similarity[item_i, item_j]

    # Logit choice with temperature (lower = more deterministic)
    temperature = 0.8
    exp_u = np.exp(utilities / temperature)
    probs = exp_u / exp_u.sum()

    # Simulate user choices
    freq = {item: 0 for item in items}
    choices = np.random.choice(items, size=n_obs_per_menu, p=probs)
    for c in choices:
        freq[c] += 1

    frequencies.append(freq)

log = StochasticChoiceLog(
    menus=menus,
    choice_frequencies=frequencies,
    item_labels=item_labels,
)

# Analysis
print("=" * 70)
print("A/B TESTING PRODUCT FEATURES - STOCHASTIC CHOICE ANALYSIS")
print("=" * 70)
print(f"\nTest Configuration:")
print(f"  Product variants: {n_items}")
print(f"  Test conditions: {n_menus}")
print(f"  Users per condition: {n_obs_per_menu}")
print(f"  Total observations: {n_menus * n_obs_per_menu:,}")

# McFadden axioms
axioms = test_mcfadden_axioms(log)
print(f"\nMcFadden Axiom Tests:")
print(f"  IIA satisfied: {axioms['satisfies_iia']}")
print(f"  Regularity satisfied: {axioms['satisfies_regularity']}")
print(f"  RUM consistent: {axioms['is_rum_consistent']}")

# IIA analysis
iia_holds = check_independence_irrelevant_alternatives(log, tolerance=0.15)
print(f"  IIA (15% tolerance): {iia_holds}")

# Fit model
result = fit_random_utility_model(log, model_type="logit")
print(f"\nLogit Model Fit:")
print(f"  Log-likelihood: {result.log_likelihood:.2f}")
print(f"  AIC: {result.aic:.2f}")
print(f"  BIC: {result.bic:.2f}")

# Per-condition analysis
print(f"\nPer-Condition Results:")
print("-" * 70)
print(f"{'Condition':<35} {'Menu':<20} {'Winner':<12} {'Win %':<8}")
print("-" * 70)

for i, (menu, freq, desc) in enumerate(zip(menus, frequencies, menu_descriptions)):
    items = list(menu)
    total = sum(freq.values())
    winner = max(freq, key=freq.get)
    win_pct = 100 * freq[winner] / total
    menu_str = ",".join(item_labels[it][:6] for it in sorted(items))
    print(f"{desc:<35} {menu_str:<20} {item_labels[winner]:<12} {win_pct:.1f}%")

# IIA violation demonstration
print(f"\n" + "=" * 70)
print("IIA VIOLATION ANALYSIS (Premium vs Premium+ Effect)")
print("=" * 70)

# Find the control (Basic vs Premium) and test (Basic vs Premium vs Premium+)
control_idx = 5  # Basic vs Premium (control)
test_idx = 6     # Basic vs Premium vs Premium+

control_freq = frequencies[control_idx]
test_freq = frequencies[test_idx]

# In control: ratio of Premium to Basic
control_total = sum(control_freq.values())
p_premium_control = control_freq.get(1, 0) / control_total
p_basic_control = control_freq.get(0, 0) / control_total
ratio_control = p_premium_control / p_basic_control if p_basic_control > 0 else float('inf')

# In test: ratio of Premium to Basic (after adding Premium+)
test_total = sum(test_freq.values())
p_premium_test = test_freq.get(1, 0) / test_total
p_basic_test = test_freq.get(0, 0) / test_total
ratio_test = p_premium_test / p_basic_test if p_basic_test > 0 else float('inf')

print(f"\nControl condition (Basic vs Premium):")
print(f"  P(Premium) = {p_premium_control:.3f}")
print(f"  P(Basic) = {p_basic_control:.3f}")
print(f"  Odds ratio Premium/Basic = {ratio_control:.2f}")

print(f"\nTest condition (Basic vs Premium vs Premium+):")
print(f"  P(Premium) = {p_premium_test:.3f}")
print(f"  P(Basic) = {p_basic_test:.3f}")
print(f"  P(Premium+) = {test_freq.get(2, 0) / test_total:.3f}")
print(f"  Odds ratio Premium/Basic = {ratio_test:.2f}")

print(f"\nIIA Test Result:")
if abs(ratio_control - ratio_test) > 0.2:
    print(f"  IIA VIOLATED: Adding Premium+ changed Premium/Basic odds")
    print(f"  Ratio change: {ratio_control:.2f} -> {ratio_test:.2f}")
    print(f"  Premium+ cannibalized Premium more than Basic (similarity effect)")
else:
    print(f"  IIA holds: Premium/Basic odds stable")

# Business insights
print(f"\n" + "=" * 70)
print("BUSINESS INSIGHTS")
print("=" * 70)

# Aggregate choice shares
total_choices = {i: 0 for i in range(n_items)}
total_appearances = {i: 0 for i in range(n_items)}

for menu, freq in zip(menus, frequencies):
    for item in menu:
        total_appearances[item] += sum(freq.values())
        total_choices[item] += freq.get(item, 0)

print(f"\nOverall Product Performance:")
print(f"{'Product':<15} {'Choice Share':<15} {'Win Rate':<12}")
print("-" * 45)

for i in range(n_items):
    if total_appearances[i] > 0:
        share = 100 * total_choices[i] / sum(total_choices.values())
        win_rate = 100 * total_choices[i] / total_appearances[i]
        print(f"{item_labels[i]:<15} {share:>8.1f}%       {win_rate:>6.1f}%")

Example output:

======================================================================
A/B TESTING PRODUCT FEATURES - STOCHASTIC CHOICE ANALYSIS
======================================================================

Test Configuration:
  Product variants: 6
  Test conditions: 15
  Users per condition: 500
  Total observations: 7,500

McFadden Axiom Tests:
  IIA satisfied: False
  Regularity satisfied: True
  RUM consistent: False
  IIA (15% tolerance): False

Logit Model Fit:
  Log-likelihood: -4523.45
  AIC: 9058.90
  BIC: 9082.34

This A/B test analysis reveals IIA violations when similar products are added: Premium+ cannibalized Premium sales disproportionately, demonstrating that simple logit models may mispredict market shares when similar alternatives exist. Nested logit or mixed logit would better capture this pattern.

Notes

Stochastic Choice

IIA test - if IIA fails, logit may be inappropriate
Model fit statistics:
- Log-likelihood
- AIC/BIC for model comparison
- Regularity violations
Alternatives to logit:
- Nested logit for grouped alternatives
- Mixed logit for heterogeneous preferences
- Probit for flexible substitution
Sample size - stochastic tests need sufficient observations per menu

Function Reference

Purpose	Function
Fit RUM	`fit_random_utility_model()`
Test McFadden axioms	`test_mcfadden_axioms()`
Test IIA	`check_independence_irrelevant_alternatives()`
Predict probabilities	`estimate_choice_probabilities()`
Fit Luce model	`fit_luce_model()`

Tutorial: Stochastic Choice

Prerequisites

The Data (StochasticChoiceLog)

From Repeated Choices

Random Utility Models

Fitting a Logit Model

Full Summary Report

Predicting Choice Probabilities

Testing McFadden Axioms

Regularity Axiom Testing

What Violations Mean

Detailed Violation Analysis

Full Summary Report

When to Use This Test

Testing IIA (Independence of Irrelevant Alternatives)

The Red Bus / Blue Bus Problem

Application: A/B Testing for Product Features

At Scale: A/B Testing for Product Features

Notes

Stochastic Choice

Function Reference

See Also