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Optimal Categorization

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Author Info

  • 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. Jehiel, Philippe & Samet, Dov, 2007. "Valuation equilibrium," Theoretical Economics, Econometric Society, vol. 2(2), June.
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  5. Philippe Jeniel, 2001. "Analogy-Based Expectation Equilibrium," Economics Working Papers 0003, Institute for Advanced Study, School of Social Science.
  6. Basu, Kaushik, 1994. "The Traveler's Dilemma: Paradoxes of Rationality in Game Theory," American Economic Review, American Economic Association, vol. 84(2), pages 391-95, May.
  7. Itzhak Gilboa & Offer Lieberman & David Schmeidler, 2004. "Empirical Similarity," Levine's Bibliography 122247000000000684, UCLA Department of Economics.
  8. Jakub Steiner & Colin Stewart, 2006. "Contagion through Learning," ESE Discussion Papers 151, Edinburgh School of Economics, University of Edinburgh, revised 10 Aug 2007.
  9. Dow, James, 1991. "Search Decisions with Limited Memory," Review of Economic Studies, Wiley Blackwell, vol. 58(1), pages 1-14, January.
  10. 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.
  11. Philippe Jehiel & Frédéric Koessler, 2006. "Revisiting Games of Incomplete Information with Analogy-Based Expectations," Levine's Bibliography 122247000000000252, UCLA Department of Economics.
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Citations

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Cited by:
  1. Topi Miettinen, 2012. "Paying attention to payoffs in analogy-based learning," Economic Theory, Springer, vol. 50(1), pages 193-222, May.
  2. Ennio Bilancini & Leonardo Boncinelli, 2014. "Persuasion with Reference Cues and Elaboration Costs," Working Papers - Economics wp2014_04.rdf, Universita' degli Studi di Firenze, Dipartimento di Scienze per l'Economia e l'Impresa.
  3. 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.
  4. Vessela Daskalova & Nicolaas J. Vriend, 2014. "Categorization and Coordination," Working Papers 719, Queen Mary, University of London, School of Economics and Finance.
  5. Heller, Yuval & Winter, Eyal, 2013. "Rule Rationality," MPRA Paper 48746, University Library of Munich, Germany.

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