Chapter 5. Categorical Variables: Counting Eggs in the Age of Robotic Chickens
A categorical variable, as the name suggests, is used to represent categories or labels. For instance, a categorical variable could represent major cities in the world, the four seasons in a year, or the industry (oil, travel, technology) of a company. The number of category values is always finite in a real-world dataset. The values may be represented numerically. However, unlike other numeric variables, the values of a categorical variable cannot be ordered with respect to one another. (Oil is neither greater than nor less than travel as an industry type.) They are called nonordinal.
A simple question can serve as litmus test for whether something should be a categorical variable: “Does it matter how different two values are, or only that they are different?” A stock price of $500 is five times higher than a price of $100. So, stock price should be represented by a continuous numeric variable. The industry of the company (oil, travel, tech, etc.), on the other hand, should probably be categorical.
Large categorical variables are particularly common in transactional records. For instance, many web services track users using an ID, which is a categorical variable with hundreds to hundreds of millions of values, depending on the number of unique users of the service. The IP address of an internet transaction is another example of a large categorical variable. They are categorical variables because, even ...