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What is Maximum Likelihood Estimation (MLE)?
Maximum Likelihood Estimation (MLE) is a statistical method used to estimate the parameters of a probability distribution or model by finding the values that maximize the likelihood of observing the given data.
Definition
Maximum Likelihood Estimation is a technique that identifies the parameter values that make the observed data most probable under an assumed statistical model.
Key Takeaways
- A fundamental tool in statistics, data science, and econometrics.
- Estimates model parameters by maximizing likelihood functions.
- Works across linear, nonlinear, and complex probabilistic models.
Understanding Maximum Likelihood Estimation (MLE)
MLE is widely used because it provides efficient and consistent parameter estimates under many conditions. The method starts with a likelihood function—representing the probability of observing the data given a set of parameters. MLE seeks the parameter values that maximize this function.
For example, when estimating the mean of a normal distribution, MLE determines the value of the mean that makes the observed sample most likely.
MLE is foundational in machine learning algorithms, logistic regression, time series analysis, and Bayesian inference.
Formula (If Applicable)
If a dataset has observations (x_1, x_2, …, x_n) and a probability distribution with parameter (\theta), the likelihood function is:
[ L(\theta) = f(x_1|\theta) f(x_2|\theta) … f(x_n|\theta) ]
The MLE is:
[ \hat{\theta} = \arg\max_{\theta} L(\theta) ]
Often log-likelihood is used:
[ \ell(\theta) = \log(L(\theta)) ]
Real-World Example
In logistic regression (used to predict binary outcomes), MLE estimates the coefficients that maximize the likelihood of observing the pattern of outcomes in the dataset.
Importance in Business or Economics
MLE enables precise modelling of consumer behaviour, financial risk, market forecasting, and econometric analysis. It supports data-driven decision-making and model calibration.
Types or Variations
- Ordinary Maximum Likelihood
- Restricted MLE
- Bayesian MLE (MAP Estimation)
Related Terms
- Likelihood Function
- Regression Analysis
- Probability Distribution
Sources and Further Reading
- Penn State – Applied Statistics
- Investopedia – Maximum Likelihood Estimation
- Wiley – Statistical Inference Texts
Quick Reference
- Estimates parameters by maximizing likelihood.
- Essential in statistics, econometrics, and machine learning.
- Provides efficient, consistent parameter estimates.
Frequently Asked Questions (FAQs)
Is MLE always accurate?
It is highly effective when model assumptions match the data.
Why use log-likelihood?
It simplifies calculations and avoids numerical issues.
Is MLE used in machine learning?
Yes, many models rely on likelihood maximization.
