Factor Analysis

Factor Analysis- What is?

Factor analysis refers to a collection of statistical methods for reducing correlational data into a smaller number of dimensions or factors A data reduction/Summarization or variable reduction technique

Factor Analysis

Large number of variables are reduced according to their interrelationships to a few number of factors. Factor analysis finds relationships or natural connections where variables are maximally correlated with one another and minimally correlated with other variables, and then groups the variables accordingly

Factor Analysis - types

Exploratory factor analysis (EFA ) - Principal Component Analysis:

to uncover the underlying structure of a relatively large set of variables.

Confirmatory factor analysis (CFA) principal axis factoring/principal factor analysis

To determine if the number of factors and the loadings of measured (indicator) variables on them conform to what is expected on the basis of pre-established theory

Factor Analysis

Exploratory factor analysis (EFA) seeks to uncover the underlying structure of a relatively large set of variables. The researcher's priori assumption is that any indicator may be associated with any factor. This is the most common form of factor analysis. There is no prior theory and one uses factor loadings to intuit the factor structure of the data.

Factor Analysis

Confirmatory factor analysis (CFA) seeks to determine if the number of factors and the loadings of measured (indicator) variables on them conform to what is expected on the basis of pre-established theory.

Factor Analysis Applications

Finding out hidden dimensions for explaining a business phenomenon.

(Interdependency and pattern delineation)

Structure , Classification and profiling ( customers in marketing)

FA using SPSS

SPSS procedure: Select Analyze - Data Reduction - Factor - Variables (input variables) - Descriptives Under Correlation Matrix, check KMO and Antiimage to get overall and individual KMO statistics Extraction - Method (principal components) and Analyze (correlation matrix) and Display (Scree Plot) and Extract (eigenvalues over 1.0) - Continue - Rotation - under Method, choose Varimax Continue - Scores - Save as variables - Continue OK.

Factor Analysis Sampling Adequacy

Measured by the Kaiser-Meyer-Olkin (KMO) statistics, sampling adequacy predicts if data are likely to factor well, based on correlation and partial correlation

There is a KMO statistic for each individual variable, and their sum is the KMO overall statistic. KMO varies from 0 to 1.0 and KMO overall should be .60 or higher to proceed with factor analysis.

Factor Analysis
Key Concepts

Factor loadings/component loadings in PCA, are the correlation coefficients between the variables (rows) and factors (columns). Analogous to Pearson's r, the squared factor loading is the percent of variance in that variable explained by the factor

Factor Analysis
Communality,

h2, is the squared multiple correlation for the variable as dependent using the factors as independent. The communality measures the percent of variance in a given variable explained by all the factors jointly and may be interpreted as the reliability of the indicator . It should be higher than 0.25

Factor Analysis
values/characteristic roots. The eigen value for a given factor measures the variance in all the variables which is accounted for by that factor. The ratio of eigen values is the ratio of explanatory importance of the factors with respect to the variables.
Eigen

Factor Analysis How Many Factors ???

Variance

explained criteria: Some researchers simply use the rule of keeping enough factors to account for 90% (sometimes 80%) of the variation. Where the researcher's goal emphasizes parsimony (explaining variance with as few factors as possible), the criterion could be as low as 50%.

Factor Analysis
Kaiser

criterion: A common rule of thumb for dropping the least important factors from the analysis. The Kaiser rule is to drop all components with eigen values under 1.0.

Factor Analysis Rotation

No rotation is the default, but it is a good idea to select a rotation method, usually varimax. The original, unrotated principal components solution maximizes the sum of squared factor loadings, efficiently creating a set of factors which explain as much of the variance in the original variables as possible. However, unrotated solutions are hard to interpret because variables tend to load on multiple factors

Factor Analysis Rotation

Varimax rotation is an orthogonal rotation of the factor axes to maximize the variance of the squared loadings of a factor (column) on all the variables (rows) in a factor matrix, which has the effect of differentiating the original variables by extracted factor A Varimax solution yields results which make it as easy as possible to identify each variable with a single factor. This is the most common rotation option.

Factor Analysis Rotation

Oblique

rotation is an alternative rotation if factors are believed to be correlated with each other

MBA Study Correlation Coefficients

Variable V1 V2 V3 V4 V5 V6 V7 V8 V9 V10 Course Financial Accounting Managerial Accounting Finance Marketing Human Behavior Organization Design Production Probability Statistical Inference Quantitative Analysis V1 1.00 0.56 0.17 -.14 -.19 -.21 -.44 0.30 -.05 -.01 V2 0.56 1.00 -.22 0.05 -.26 -.00 -.11 0.06 0.06 0.06 V3 .017 -.22 1.00 -.48 -.05 -.56 -.04 0.07 -.32 0.42 V10 -.01 0.06 0.42 -.10 -.23 -.05 -.08 -.10 0.06 1.00

Factor Loadings, Eigen values & Communalities

Variable V1 V2 V3 V4 V5 V6 V7 V8 V9 V10 Eigenvalue Percent of variance Cumulative percent Course Financial Accounting Managerial Accounting Finance Marketing Human Behavior Organization Design Production Probability Statistical Inference Quantitative Analysis Factor 1 0.41 0.01 0.89 -.60 0.02 -.43 -.11 0.25 -.43 0.25 1.83 18.30 18.30 Factor 2 0.71 0.53 -.17 0.21 -.24 -.09 -.58 0.25 0.43 0.04 1.52 15.20 33.50 Factor 3 0.23 -.16 0.37 0.30 -.22 -.36 -.03 -.31 0.50 0.35 0.95 9.50 43.00 Communality 0.73 0.31 0.95 0.49 0.11 0.32 0.35 0.22 0.62 0.19