FACTOR ANALYSIS

CHRIST UNIVERSITY
DEVI SOUMYAJA
Factor Analysis
• Factor analysis is a general name denoting
a class of procedures primarily used for
data reduction and summarization.
• Factor analysis is an interdependence
technique in that an entire set of
interdependent relationships is examined
without making the distinction between
dependent and independent variables.
• Metric data
Background
• Factor analysis is a data reduction
technique
• Used when variables are many
• And correlated
• No point when variables are
uncorrelated
Factor Analysis
Also known as PRINCIPAL COMPONENT ANALYSIS

Objective is DATA REDUCTION, and DATA

SUMMARIZATION

To analyze the underlying ‘structure’ in a given data

set (or a set of variables)

To reduce the number of variables

To group similar (or correlated) variables

• Lots of correlated variables are there

• After FA, unmanageable no. of variables gets reduced to a few
manageable factors
Managerial applications
• Scale construction
• Psychographic profiling
• Segmentation analysis –Marketing
Studies
Steps in FA

• Formulate the problem

• Collect data, enter them
• Subject them to FA using SPSS/SAS/Minitab
• Extract the factors
• Rotate the factors, if necessary
• Name the factors
 Conducting Factor Analysis
Formulate the Problem

• The objectives of factor analysis should be identified.

• The variables to be included in the factor analysis

should be specified based on past research, theory,
and judgment of the researcher. It is important that
the variables be appropriately measured on an
interval or ratio scale.

• An appropriate sample size should be used. As a

rough guideline, there should be at least four or five
times as many observations (sample size) as there
are variables.
Conducting Factor Analysis
Construct the Correlation Matrix
• The analytical process is based on a matrix of correlations between the
variables- Correlation matrix
• Bartlett's test of sphericity can be used to test the null hypothesis that
the variables are uncorrelated in the population. To test whether the
correlations among the variables is adequate (and significant) –
significance should be <0.05).
• Another useful statistic is the Kaiser-Meyer-Olkin (KMO) measure of
sampling adequacy. Small values of the KMO statistic indicate that the
correlations between pairs of variables cannot be explained by other
variables and that factor analysis may not be appropriate. (should be
>0.50). Values below 0.5 imply that factor analysis may not be
appropriate.
Statistics Associated with Factor Analysis
• Communality. Communality is the amount of variance a variable shares with
all the other variables being considered. This is also the proportion of
variance explained by the common factors.
• Eigenvalue. The eigenvalue represents the total variance explained by each
factor.
• Factor loadings. Factor loadings are simple correlations between the variables
and the factors.
• Factor matrix. A factor matrix contains the factor loadings of all the variables
on all the factors extracted.
• Factor scores. Factor scores are composite scores estimated for each
respondent on the derived factors.
• Percentage of variance. The percentage of the total variance attributed to
each factor.
• Scree plot. A scree plot is a plot of the Eigenvalues against the number of
factors in order of extraction.
Conducting Factor Analysis
Extraction of factor actors

• In principal components analysis, the total variance in

the data is considered. The diagonal of the correlation
matrix consists of unities, and full variance is brought
into the factor matrix.
• Determines the minimum number of factors that will
account for maximum variance in the data for use in
subsequent multivariate analysis. The factors are called
principal components.
• The first factor explains the largest variance and is
called first principal factor
Statistics Associated with Factor Analysis

• No: of factors to be extracted:

1. Based on theory
2. Based on eigen value ( eigen value should be
atleast 1)
3. Scree plot
4. Percentage of variance explained
Conducting Factor Analysis
Determine the Number of Factors
• A Priori Determination. Sometimes, because of prior
knowledge, the researcher knows how many factors to expect
and thus can specify the number of factors to be extracted
beforehand.
Determination Based on Eigenvalues. In this approach, only
factors with Eigenvalues greater than 1.0 are retained. An
Eigenvalue represents the amount of variance associated with
the factor. Hence, only factors with a variance greater than 1.0
are included. Factors with variance less than 1.0 are no better
than a single variable, since, due to standardization, each
variable has a variance of 1.0. If the number of variables is less
than 20, this approach will result in a conservative number of
factors.
Conducting Factor Analysis
Determine the Number of Factors
• Determination Based on Scree Plot. A scree plot is a plot of
the Eigenvalues against the number of factors in order of
extraction. Experimental evidence indicates that the point at
which the scree begins denotes the true number of factors.
Generally, the number of factors determined by a scree plot
will be one or a few more than that determined by the
Eigenvalue criterion.

• Determination Based on Percentage of Variance. In this

approach the number of factors extracted is determined so
that the cumulative percentage of variance extracted by the
factors reaches a satisfactory level. It is recommended that the
factors extracted should account for at least 60% of the
variance.
 Scree Plot
3.0
Fig. 19.3

2.5

2.0
Eigenvalue

1.5

1.0

0.5
0.0

1 2 3 4 5 6
Component Number
FACTOR EXTRACTION
• Based on eigen value

• Component Initial Eigenvalues

• Total % of VarianceCumulative %
• 1 3.860 21.447 21.447
• 2 2.275 12.640 34.087
• 3 1.738 9.658 43.745
• 4 1.436 7.975 51.720
• 5 1.244 6.910 58.630
• 6 1.104 6.131 64.761
• 7 .952 5.289 70.050
• 8 .847 4.703 74.753
• 9 .777 4.316 79.069
• 10 .668 3.714 82.783
• 11 .620 3.442 86.225
• 12 .532 2.953 89.178
• 13 .491 2.727 91.904
• 14 .412 2.287 94.191
• 15 .312 1.735 95.926
• 16 .295 1.637 97.563
• 17 .259 1.439 99.002
• 18 .180 .998 100.000
Case Analysis 16.1
Metric data
No: of variables= 8
Sample size= 75 is greater than 8*5=40

KMO is 0.613 and thus factor analysis can be

used for the data set
Bartlett test of sphericity is significant as the p
value is 0.000 which is less than 0.05 level of
significance and thus the variables are highly
correlated
SCREE PLOT
COMPONENT MATRIX
• Check table from SPSS output
• Eigen value calculation
• Communality Calculation
 Conducting Factor Analysis
Rotate Factors
• Although the initial or unrotated factor matrix indicates the
relationship between the factors and individual variables, it
seldom results in factors that can be interpreted, because the
factors are correlated with many variables. Therefore, through
rotation the factor matrix is transformed into a simpler one that
is easier to interpret.
• In rotating the factors, we would like each factor to have
nonzero, or significant, loadings or coefficients for only some of
the variables. Likewise, we would like each variable to have
nonzero or significant loadings with only a few factors, if
possible with only one.
• The rotation is called orthogonal rotation if the axes are
maintained at right angles.
Conducting Factor Analysis
Rotate Factors
• The most commonly used method for rotation
is the varimax procedure. This is an
orthogonal method of rotation that minimizes
the number of variables with high loadings on
a factor, thereby enhancing the interpretability
of the factors. Orthogonal rotation results in
factors that are uncorrelated. .
Rotation of factors
• Cut off point generally taken above 0.5
• A variable which appears in one factor does not appear in other
• Refer rotated component matrix in the spss output
Labelling or Naming the factors
• No: of factors extracted= 6
• Factor 1: Convenience features, Colours available, Safety and
driving pleasure
• Factor 2: Engine capacity, Fuel efficiency, Running and
maintaining cost
• Factor 3: After sales service, Brand name, Performance
information available
Labelling or Naming the factors
• Factor 4: Purpose of purchase, Car image and positioning,
Advertising and Marketing
• Factor 5:Price on road, Resale value, Discount scheme
• Factor 6: Looks and Design
• Where to include the variable economical ?
FINAL FACTORS