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If a discrete variable, on which the training procedure tries to make a split, takes more than max_categories values, the precise best subset estimation may take a very long time (as the algorithm is exponential). Instead, many decision trees engines (including ML) try to find sub-optimal split in this case by clustering all the samples into max_categories clusters (i.e. some categories are merged together).
Note that this technique is used only in N(>2)-class classification problems. In case of regression and 2-class classification the optimal split can be found efficiently without employing clustering, thus the parameter is not used in these cases.

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