Daniel L. McFadden
In 2000, Daniel McFadden shared the Nobel Prize in economics with James Heckman. McFadden received the prize for “his development of theory and methods for analyzing discrete choice.” The award was given for very technical work that would be hard to explain to the layman, but it has been important for economists who want to study many important issues when the choices involve discrete rather than continuous choices. Before McFadden’s work, empirical economists who studied various issues tended to assume that the variables they were studying were continuous. This works well when one studies, say, the demand for sugar, because people buy various amounts of sugar along a continuum. But what if one is studying the demand for refrigerators? Because most people have only one refrigerator, the choice of a refrigerator is a discrete choice. Or what if one is studying people’s choice of travel modes for getting to work? Most people do not take the subway one day, a bus the next, and a car the day after that; most use one of those modes almost all the time. Economists needed a way to do empirical work on such discrete choices, but the tools to do so were missing.
That is where McFadden came in. In 1965, one of his graduate students at Berkeley was analyzing thesis data on the California state highway department’s choices on where to put freeways and asked for his help. Freeway placement is an example of a discrete, rather than a continuous, choice. McFadden started to solve the problem but did not finish until 1968 (the paper was published in 1976), well after her thesis was done. In solving it, he created a technical method for dealing econometrically with discrete choices generally.
McFadden tested his model with data on people’s transportation choices before the Bay Area Rapid Transit (BART) system was built in the San Francisco Bay Area. While the official forecast was 15 percent, McFadden used his model to predict that only 6.3 percent of Bay Area travelers would use BART. The actual number turned out to be 6.2 percent.
McFadden has also used his own methods to analyze investments in telephone service and housing for seniors.