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Source: Card sorting

Card sorting is a technique in user experience design in which a person tests a group of subject experts or users to generate a dendrogram (category tree) or folksonomy. It is a useful approach for designing information architecture, workflows, menu structure, or web site navigation paths.
Card sorting uses a relatively low-tech approach. The person conducting the test (usability analyst, user experience designer, etc.) first identifies key concepts and writes them on index cards or Post-it notes. Test subjects, individually or sometimes as a group, then arrange the cards to represent how they see the structure and relationships of the information.
Groups can be organized as collaborative groups (focus groups) or as repeated individual sorts. The literature discusses appropriate numbers of users needed to produce trustworthy results.
A card sort is commonly undertaken when designing a navigation structure for an environment that offers a variety of content and functions, such as a web site. In that context, the items to organize are those significant in the environment. The way the items are organized should make sense to the target audience and cannot be determined from first principles.
The field of information architecture is founded on the study of the structure of information. If an accepted and standardized taxonomy exists for a subject, it would be natural to apply that taxonomy to organize both the information in the environment, and any navigation to particular subjects or functions. Card sorting is useful when:

The variety of items to organize is so great that no existing taxonomy is accepted as organizing the items.
Similarities among the items make them difficult to divide clearly into categories.
Members of the audience that uses the environment differ significantly in how they view the similarities among items and the appropriate groupings of items.