Characteristics Space

Abstract

The characteristics space of a class of heterogeneous goods is the vector space whose coordinates index the attributes that buyers value, and in which each good is represented by the vector of its attribute levels. This second article in the Foundations section of The Valuation Engineer Journal introduces the formal apparatus due to Lancaster (1966): the move from goods-as-primitives to goods-as-vectors. An extended Pacifica, California dataset of eight residential comparables illustrates how each comp is a point in a four-dimensional space of characteristics, spanning gross living area, lot size, view, and condition. The entry also shows how a naive Euclidean distance metric misleads comp selection when axes are not scaled by their implicit prices, motivating the apparatus developed in the following entries.