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Dynamic Scoring: Probabilistic Model Selection Based on Utility Maximization.

Jan Vecer1,2

  • 1Department of Probability and Mathematical Statistics, Charles University, Sokolovska 83, 18675 Praha, Czech Republic.

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|December 3, 2020
PubMed
Summary

This study introduces a novel betting market to compare probability estimates. The correct probability estimate yields expected profits, serving as a measure of information in dynamic settings.

Keywords:
equilibriumexplicit supply and demand functionsimplied probabilitymodel selectionprediction marketsstatistical divergenceutility maximization

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Area of Science:

  • Decision Sciences
  • Probability Theory
  • Financial Markets

Background:

  • Accurate probability estimation is crucial for decision-making in dynamic environments.
  • Existing model selection methods may not fully capture the nuances of time-evolving probabilities.

Purpose of the Study:

  • To introduce a novel mechanism for model selection of probability estimates.
  • To establish a framework for comparing probability estimates using a hypothetical betting market.

Main Methods:

  • A hypothetical betting market mechanism is described where agents trade probabilities.
  • Agents' optimal trading volumes are determined by utility functions (logarithmic and exponential).
  • Supply and demand functions are derived to determine bet sizes based on trading probabilities.

Main Results:

  • The intersection of supply and demand functions determines the trading price for probability estimates.
  • An agent using the correct probabilities is shown to realize an expected profit when trading against incorrect estimates.
  • Expected profit serves as a quantifiable measure of information, analogous to statistical divergence.

Conclusions:

  • The proposed betting market offers a practical approach for model selection in time-evolving probability estimation.
  • The expected profit generated in this market provides a robust measure of the quality of probability estimates.
  • This method has implications for various fields requiring accurate forecasting and decision-making under uncertainty.