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BA Note on Construction of a Composite Index by Optimization of Shapley Value Shares of the Constituent Variables

Author

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  • Sudhanshu K. MISHRA

    (North-Eastern Hill University, New Delhi, India)

Abstract

This paper proposes a method to construct composite index, which is a linear combination of several variables, by deriving weights on the criterion of Shapley value (from cooperative game theory) that a constituent variable has in making the composite index. In practice it is found oftentimes that the most common method of principal component analysis has a tendency to ignore (or poorly weigh) those constituent variables that do not have strong correlation with the sister variables. This elitist nature of PCA forces a compromise upon the analyst’s desire and need to incorporate those weakly correlated (but theoretically and practically important) variables into the composite index. In that case, one must construct a composite index that is more inclusive in nature. The Shapley value based composite index meets that requirement.

Suggested Citation

  • Sudhanshu K. MISHRA, 2016. "BA Note on Construction of a Composite Index by Optimization of Shapley Value Shares of the Constituent Variables," Turkish Economic Review, EconSciences Journals, vol. 3(3), pages 466-472, September.
    • Handle: RePEc:cvv:journ2:v:3:y:2016:i:3:p:466-472
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    JEL classification:

    • C43 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Index Numbers and Aggregation
    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
    • C71 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Cooperative Games

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