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

Sudhanshu Mishra ()

Turkish Economic Review, 2016, vol. 3, issue 3, 466-472

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.

Keywords: Shapley value; Composite index; Principal Component Analysis; Inclusive indices; Global optimization (search for similar items in EconPapers)
JEL-codes: C43 C63 C71 (search for similar items in EconPapers)
Date: 2016
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (9)

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