Factor Analysis (Optional Session)

Factor Analysis

What is Factor Analysis

Data Reduction Technique

A factor is a weighted sum of the variables The goal is to summarize the information in a larger number of correlated variables into a smaller number of factors that are not correlated with each other.

In contrast to Regression, there is no dependent variable. We just look at the correlations between variables to summarize.

Factor Analysis

Graphical Intuition: Factor Analysis works when data are correlated

Figure 1

2.3

C
2.2

Y
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A
2.0 0.0 0.1 0.2 0.3 0.4

D
X
0.5 0.6 0.7 0.8 0.9 1.0

Factor Analysis

Graphical Intuition: Factor Analysis will not work when variables are uncorrelated
Figure 2

1.0 0.9 0.8 0.7 0.6

0.5 0.4 0.3 0.2 0.1 0.0 0.0 0.1 0.2 0.3 0.4

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Factor Analysis

When to do Factor Analysis in business research?

Applications

Eliminating Multicollinearity problems in Regression Measuring managerially useful constructs

Intelligence, Leadership Skills, Customer satisfaction

Useful in constructing perceptual maps of products that are useful in positioning studies

Factor Analysis

Perceptual Map Example

Perceptual Map for Cars
1.5

VW Golf
Economy

1 0.5

Dodge Neon

Camry
-1.5 -1

Taurus
0 -0.5 -0.5 -1 -1.5 Fashion
Factor Analysis

0.5

1.5

Lexus ES 300 BMW325

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Applying Factor Analysis: Evaluating MBA Applications

Suppose school believes success of future managers depends on

Intelligence Teamwork and Leadership skills

Factor Analysis

Applying Factor Analysis: Evaluating MBA Applications

Variables available

GPA GMAT score Which variables Scholarships, fellowships won do you believe Evidence of Communications skills correlate with Prior Job Experience intelligence and Organizational Experience Other extra curricular achievements teamwork and

leadership skills?

Factor Analysis

Data

Applicant 1 2 3

GPA 3.7

GMAT 680

Scholar ship 3.5

Commun Job Ex ication 4.4 4

Org. skills 3

Extracur ricular 2

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Factor Analysis

Quick and dirty sense of the data: Looking at the correlation matrix

Attribute GPA GMAT Fellowsh Comm Job Ex Org Ex Extra Cur

GPA 1.00 0.97 0.96 0.43 0.05 -0.05 -0.12

GMAT Fellowship 0.97 1.00 0.99 0.55 0.27 0.16 0.12 0.96 0.99 1.00 0.47 0.19 0.07 0.05

Comm Job Ex 0.43 0.55 0.47 1.00 0.82 0.79 0.69 0.05 0.27 0.19 0.82 1.00 0.99 0.98

Org Ex -0.05 0.16 0.07 0.79 0.99 1.00 0.97

Extra Curr -0.12 0.12 0.05 0.69 0.98 0.97 1.00

Even if data is not as neatly correlated as here Factor analysis will be helpful
Factor Analysis

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First Step: Do Principal Component Analysis (PCA) to select # of factors

PCA uses the correlation matrix of the data and constructs factors

Factors If there are n variables we will have n factors First factor will explain most variance, second next, and so on Variance Explained by Factors With standardized variables each variable has a variance of 1, so the total variance in n variables is n Each factor will have an associated eigen-value which is the amount of variance explained by that factor
Factor Analysis

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SPSS Output of PCA: Eigen Analysis

Total Variance Explained Initial Eigenvalues % of Variance Cumulative % 53.480 53.480 32.398 85.878 6.069 91.948 4.113 96.060 1.994 98.054 1.406 99.460 .540 100.000 Extraction Sums of Squared Loadings Total % of Variance Cumulative % 3.744 53.480 53.480 2.268 32.398 85.878

Component 1 2 3 4 5 6 7

Total 3.744 2.268 .425 .288 .140 .098 .038

Extraction Method: Principal Component Analysis.

85.9% of variance in 7 variables explained by just 2 factors

Factor Analysis

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SPSS Output of PCA: Scree Plot

Factor Analysis

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Second Step: Do Factor Analysis with number of factors selected from Step 1

First interpret resulting factors

Use factor loadings to interpret factors If it is not interpretable use rotation options until we get something that can be interpreted

Look at factor equations and factor scores

Score plots will be useful

Factor Analysis

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Why not Unrotated Factor Loadings? Variables correlation with the factors
Unrotated Factor Loadings and Communalities
Component Matrixa Component 1 2 .891 -.388 .766 -.586 .777 -.552 .883 .052 .683 .662 .518 .730 .493 .705

gmat gpa fellow comm jobex organze extra

Extraction Method: Principal Component Analysis. a. 2 components extracted. Factor Analysis

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Interpreting Factors: Looking at Loading Plot without Rotations

Loading Plot of GMAT-Extra without Rotations

Factor Analysis

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Rotated Factor Loadings: Variables correlation with the factors

Rotated Factor Loadings and Communalities Varimax Rotation a Rotated Component Matrix
Component 1 2 .954 .186 .963 -.048 .953 -.014 .698 .543 .187 .933 .013 .895 .007 .860

gmat gpa fellow comm jobex organze extra

Extraction Method: Principal Component Analysis. Rotation Method: Varimax with Kaiser Normalization. a. Rotation converged in 3 iterations.

Factor Analysis

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Interpreting Factors: Looking at Loading Plot with Rotation

Loading Plot of GMAT-Extra with Rotations

Factor Analysis

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Naming Factors

Apriori, theory based selection of variables

Should be easy to name factors

Otherwise use managerial intuition

Factor Analysis

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How did applicants score on Intelligence and Leadership Factors

Component Score Coefficient Matrix Component 1 2 .293 -.006 .315 -.097 .309 -.083 .181 .153 -.015 .344 -.068 .343 -.068 .331 gmat gpa fellow comm jobex organze extra

Extraction Method: Principal Component Analysis. Rotation Method: Varimax with Kaiser Normalization. Component Scores.

Intelligence=0.293 GMAT + 0.315 GPA + 0.309 Fellowships + 0.181 Communications - 0.015 Job Ex - 0.068 Organizational Skills - 0.068 ExtraCurricular Leadership= - 0.006 GMAT - 0.097 GPA - 0.083 Fellowships + 0.153 Communications + 0.344 Job Ex + 0.343 Organizational Skills + 0.331 ExtraCurricular
Factor Analysis

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Which Applicants to select for Haas: The Score Plot

Too risky
1
Too Risky Successful Applicants

Successful applicants

F2Score

No Good

Sure rejects

-1

Bookworms Book worms

-2

-2

-1

0 F1Score
Factor Analysis

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Step 1: Choosing number of factors to extract from data

Do Factor Analysis In SPSS select Analyze>Data Reduction>Factor Select Extraction, select Principle Component Analysis

Select the variables you want to factor analyze in Variables box Select Correlation as the data that will be analyzed; this will mean that the data will be standardized and therefore each variable will have equal effect. Ask for Scree Plot (using Graphs button) which graphs the amount of variance explained by each factor
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Step 2: Performing Factor Analysis with # of factors from Step 1

Do Factor Analysis

Number of Factors to extract should be from Step 1 Try None rotation for a start (else try Varimax or others if it doesnt work) In Graphs: select loading plot and score plot In Storage: in the scores box store the factor scores by selecting 2 variables

Factor Analysis

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