Robust latent data representations

Larry Samuelson and Jakub Steiner

No 460, ECON - Working Papers from Department of Economics - University of Zurich

Abstract: Economic agents often infer latent structures—such as preference types— from data, without exogenously specified priors. We model such agents as empirical Bayesians. They estimate both the prior over types and the meanings of types via maximum likelihood. We show this estimation is equivalent to decomposing the sample into subsamples, each best explained by a single available latent type, with the decomposition minimizing the average misfit. The equivalence yields structural properties: optimal latent representations are robust (type definitions locally invariant to data changes) and simple (type count bounded). We extend these properties to agents who face frictions in evaluating likelihoods.

Keywords: Bayesian updating; cognitive constraints; belief formation; machine learning in economics; Bayesian networks (search for similar items in EconPapers)
JEL-codes: D8 (search for similar items in EconPapers)
Date: 2024-11, Revised 2025-07
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:zur:econwp:460

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