The world is overabundant with feature-rich information obscuring the latent causes of experience. How do people approximate the complexities of the external world with simplified internal representations that generalize to novel examples or situations? Theories suggest that internal representations could be determined by decision boundaries that discriminate between alternatives, or by distance measurements against prototypes and individual exemplars. Each provide advantages and drawbacks for generalization. We therefore developed theoretical models that leverage both discriminative and distance components to form internal representations via action-reward feedback. We then developed three latent-state learning tasks to test how humans use goal-oriented discrimination attention and prototypes/exemplar representations. The majority of participants attended to both goal-relevant discriminative features and the covariance of features within a prototype. A minority of participants relied only on the discriminative feature. Behaviour of all participants could be captured by parameterizing a model combining prototype representations with goal-oriented discriminative attention.