Categorical Cognition: A psychological model of categories and identification in decision making

This paper introduces a psychological notion of categorization into economics and derives its implications for economic decision making. We show, using a tractable model of social cognition, that a decision maker in (efficiently) assigning past experiences to categories, will sort experiences of interaction with larger (majority) groups more finely than experiences with smaller (minority) groups. We then apply the model to understand simple forms of discrimination and social identity. It is shown that discrimination in hiring can result from such cognitive processes even when there is no malevolent taste to do so and workers' qualifications are fully observable. The model also provides a framework that is equipped to investigate the social psychological concept of identity, where identity is viewed as self-categorization.