Abstract:
We illustrate and discuss several general issues associated with the random component of utility, or more generally
"unobserved variability". We posit a general conceptual framework that suggests a variance components view as
an appropriate structure for unobserved variability. This framework suggests that "unobserved heterogeneity" is
only one component of unobserved variability; hence, a more general view is required. We review a considerable
amount of empirical research that suggests that random components are unlikely to be independent of systematic
components, and random component variances are unlikely to be constant between or within individuals, time
periods, locations, etc. We also review evidence that random components are functions of (elements of) systematic
components. The latter suggests considerable caution in the use and interpretation of complex choice model
specifications, in particular recently introduced forms of random parameter models that purport to estimate
distributions of preference parameters. Several areas for future research are identified and discussed.
