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Optimal Categorization

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  • Mohlin, Erik

    ()
    (Dept. of Economics, Stockholm School of Economics)

Abstract

The importance of categorical reasoning in human cognition is well-established in psychology and cognitive science, and it is generally acknowledged that one of the most important functions of categorization is to facilitate prediction. This paper provides a model of optimal categorization. In the beginning of each period a subject observes a two-dimensional object in one dimension and wants to predict the object's value in the other dimension. The subject partitions the space of objects into categories. She has a data base of objects that were observed in both dimensions in the past. The subject determines what category the new object belongs to on the basis of observation of its first dimension. The average value in the second dimension, of objects in this category in the data base, is used as prediction for the object at hand. At the end of each period the second dimension is observed and the observation is stored in the data base. The main result is that the optimal number of categories is determined by a trade-off between (a) decreasing the size of categories in order to enhance category homogeneity, and (b) increasing the size of categories in order to enhance category sample size.

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Bibliographic Info

Paper provided by Stockholm School of Economics in its series Working Paper Series in Economics and Finance with number 721.

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Length: 41 pages
Date of creation: 31 May 2009
Date of revision: 08 Jul 2009
Handle: RePEc:hhs:hastef:0721

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Related research

Keywords: Categorization; Priors; Prediction; Similarity-Based Reasoning.;

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References

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  1. Punj, Girish & Moon, Junyean, 2002. "Positioning options for achieving brand association: a psychological categorization framework," Journal of Business Research, Elsevier, vol. 55(4), pages 275-283, April.
  2. Joshua Coval & Jakub Jurek & Erik Stafford, 2009. "The Economics of Structured Finance," Journal of Economic Perspectives, American Economic Association, vol. 23(1), pages 3-25, Winter.
  3. Azrieli, Yaron, 2009. "Categorizing others in a large game," Games and Economic Behavior, Elsevier, vol. 67(2), pages 351-362, November.
  4. Philippe Jehiel, 2005. "Analogy-Based Expectation Equilibrium," Levine's Bibliography 784828000000000106, UCLA Department of Economics.
  5. Friederike Mengel, 2007. "Learning Across Games," Working Papers. Serie AD 2007-05, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
  6. Philippe Jehiel & Dov Samet, 2003. "Valuation Equilibria," Game Theory and Information 0310003, EconWPA.
  7. Philippe Jehiel & Frédéric Koessler, 2006. "Revisiting Games of Incomplete Information with Analogy-Based Expectations," Levine's Bibliography 122247000000000252, UCLA Department of Economics.
  8. Itzhak Gilboa & David Schmeidler, 2002. "Inductive Inference: An Axiomatic Approach," Levine's Working Paper Archive 391749000000000544, David K. Levine.
  9. Itzhak Gilboa & Offer Lieberman & David Schmeidler, 2004. "Empirical Similarity," Levine's Bibliography 122247000000000684, UCLA Department of Economics.
  10. Steiner, Jakub & Stewart, Colin, 2008. "Contagion through learning," Theoretical Economics, Econometric Society, vol. 3(4), December.
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Cited by:
  1. Natalia Shestakova, 2010. "Pricing Scheme Choice: How Process Affects Outcome," CERGE-EI Working Papers wp411, The Center for Economic Research and Graduate Education - Economic Institute, Prague.
  2. Vessela Daskalova & Nicolaas J. Vriend, 2014. "Categorization and Coordination," Working Papers 719, Queen Mary, University of London, School of Economics and Finance.
  3. Ennio Bilancini & Leonardo Boncinelli, 2014. "Persuasion with Reference Cues and Elaboration Costs," Center for Economic Research (RECent) 102, University of Modena and Reggio E., Dept. of Economics.
  4. Heller, Yuval & Winter, Eyal, 2013. "Rule Rationality," MPRA Paper 48746, University Library of Munich, Germany.
  5. Miettinen, Topi, 2009. "Paying Attention to Payoffs in Analogy-Based Learning," SITE Working Paper Series 7, Stockholm Institute of Transition Economics, Stockholm School of Economics.

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