Factor Analysis

What is factor analysis - Reduction of number of

variables, by combining two or more variables into a single
factor. Factor analysis is used to uncover the latent structure
(dimensions).

Ex: performance at running, ball throwing during the

fielding, batting, diving to catch during the fielding could be
combined into a single factor such as general athletic ability
of a cricket player.

It reduces attribute space from a larger number of variables

to a smaller number of factors and as such is a "non-
dependent" procedure (that is, it does not assume a
dependent variable is specified).
 Factor Analysis
Selects a subset of variables from a larger set, based on
which original variables have the highest correlations
with the principal component factors.

This reduction is possible because the attributes are

related. The rating given to any one attribute is partially
the result of the influence of other attributes.

There are two approaches to factor analysis: "principal

component analysis" (the total variance in the data is
considered); and "common factor analysis" (the common
variance is considered).
 Application Area of Factor Analysis

What are the Characteristics / Attributes / Features of

the Product is really appealing to the consumers.

What really drives Buyer Behavior

Identify the Salient Attributes consumers use to

Evaluate Products in this category.

Factors affecting employee performance and loyalty

towards organization
How to Use Principal Component Analysis Method
There are two stages in Factor Analysis.

Stage One: Factor Extraction Process, wherein the objective is

to identify how many factors are to be extracted from the
data.

Rule of Thumb: Based on the computation of an EIGEN

VALUE, to determine how many factors are to be extracted.
The higher the Eigen Value for a factor, then the amount of
variance explained by the factor goes higher.

The first step in interpreting the output is to look at the factors

extracted, their EIGEN VALUES and the cumulative
percentage of variance.
 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.

Factor analysis is used in the following circumstances:

To identify underlying dimensions, or factors, that explain the
correlations among a set of variables.
To identify a new, smaller, set of uncorrelated variables to replace the
original set of correlated variables in subsequent multivariate analysis
(regression or discriminant analysis).
To identify a smaller set of salient variables from a larger set for use in
subsequent multivariate analysis.
 Factor Analysis Model
Mathematically, each variable is expressed as a linear combination of underlying
factors. The covariation among the variables is described in terms of a small
number of common factors plus a unique factor for each variable. If the
variables are standardized, the factor model may be represented as:

Xi = Ai 1F1 + Ai 2F2 + Ai 3F3 + . . . + AimFm + ViUi

where

Xi = i th standardized variable
Aij = standardized multiple regression coefficient of
variable i on common factor j
F = common factor
Vi = standardized regression coefficient of variable i on unique factor i
Ui = the unique factor for variable i
m = number of common factors
 Factor Analysis Model

The unique factors are uncorrelated with each other and with the common
factors. The common factors themselves can be expressed as linear
combinations of the observed variables.

Fi = Wi1X1 + Wi2X2 + Wi3X3 + . . . + WikXk

where

Fi = estimate of i th factor
Wi = weight or factor score coefficient
k = number of variables
 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 loading plot. A factor loading plot is a plot of the
original variables using the factor loadings as coordinates.
Factor matrix. A factor matrix contains the factor loadings of
all the variables on all the factors extracted.
 Conducting Factor Analysis - Determine the
Method of Factor Analysis
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. Principal components
analysis is recommended when the primary concern is to determine 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.

In common factor analysis, the factors are estimated based only on the
common variance. Communalities are inserted in the diagonal of the
correlation matrix. This method is appropriate when the primary
concern is to identify the underlying dimensions and the common
variance is of interest. This method is also known as principal axis
factoring.
Factor Analysis- Determine the Number of
Factors

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 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.
 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.

The rotation is called oblique rotation when the axes are not maintained
at right angles, and the factors are correlated. Sometimes, allowing for
correlations among factors can simplify the factor pattern matrix.
Oblique rotation should be used when factors in the population are likely
to be strongly correlated.
 Conducting Factor Analysis
Interpret Factors
A factor can then be interpreted in terms of the variables that
load high on it.

Another useful aid in interpretation is to plot the variables,

using the factor loadings as coordinates. Variables at the end
of an axis are those that have high loadings on only that factor,
and hence describe the factor.
 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.

The rotation is called oblique rotation when the axes are not maintained
at right angles, and the factors are correlated. Sometimes, allowing for
correlations among factors can simplify the factor pattern matrix.
Oblique rotation should be used when factors in the population are likely
to be strongly correlated.
 How to Read the output
Stage 2: Rotation of Principal Components
- After the number of extracted factors are decided in stage 1,
interpret and name the factors. (Factor Matrix is used for
this)

- Just like Correlation matrix, loading here is between 0 1 .

- The degree of correlation between the initial raw score
and the final factor score is called a factor loading.

- A factor when loaded with variables of high loadings then we

assume that these variables are having linear relationship with
the same factor. (There are two popular methods for
rotation called Varimax & Quartimax)
 Eigen Values
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.

If a factor has a low Eigen Value, then it is contributing

little to the explanation of variances in the variables and
may be ignored as redundant with more important
factors.
 Statistics
Communality, h^2, is the squared multiple
correlation for the variable. as dependent using the
factors as predictors. The communality measures
the percent of variance in a given variable
explained by all the factors jointly.

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.

Kaiser criterion is the default in most computer

programs.
 Rotation Methods
Rotation serves to make the output more
understandable and is usually necessary to
facilitate the interpretation of factors.

The sum of Eigen Values is not affected by

rotation, but rotation will alter the Eigen Values of
particular factors and will change the factor
loadings.