Society of Actuaries (SOA) PA Practice Exam

Why might someone choose hierarchical clustering over K-Means clustering?

1. It automatically determines the optimal number of clusters

2. It can visualize the data structure with dendrograms

3. It runs faster for large datasets

4. It requires fewer calculations overall

The correct answer is: It can visualize the data structure with dendrograms

Choosing hierarchical clustering often hinges on its ability to create a visual representation of the data structure through dendrograms. Dendrograms serve as tree-like diagrams that illustrate the arrangements and relationships within the data, allowing users to observe how clusters are formed and merged at different levels of similarity. This capability to visualize the results is particularly helpful in exploratory data analysis, as it provides insights into the natural grouping within the dataset, making it easier to identify potential clusters without committing to a specific number upfront. Hierarchical clustering does not automatically determine the optimal number of clusters; this requires additional analysis or interpretation from the dendrogram. Additionally, while hierarchical clustering can be informative, it is often computationally intensive, especially for large datasets, which is contrary to the premise that it runs faster or requires fewer calculations overall compared to K-Means. K-Means is generally more efficient with large datasets because it iteratively refines clusters based on centroids rather than assessing the entire data structure. Thus, the appeal of hierarchical clustering lies in its visualization capabilities, which can enhance understanding of the data's inherent structure.