The Major Flaw of the Linear Probability Model Is That $R ^ { 2 }$

question 21

Short Answer

The major flaw of the linear probability model is that a. the actuals can only be 0 and 1 , but the predicted are almost always different from that.
b. the regression $R ^ { 2 }$ cannot be used as a measure of fit.
c. people do not always make clear-cut decisions.
d. the predicted values can lie above 1 and below 0 .

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Definitions:

Liquidated Damages

Pre-determined damages specified in a contract that the parties agree on as compensation if one party breaches the contract.

Option To Terminate

A provision in a contract that allows one or more parties to end the agreement under certain conditions, before the completion date.

Force Majeure

A major, unforeseen, or unanticipated event that occurs and prevents the performance of a contract.

Frustrated Contracts Act

Legislation that deals with contracts that, through no fault of either party, cannot be fulfilled due to unforeseen events.