What is factor analysis?

Factor analysis is a process of grouping variables you've recorded into categories

called factors. This can help you reduce the total number of variables involved in a
statistical study, which can make evaluating the data easier. When conducting a
factor analysis, you may determine the similarities and differences between a set
of variables to establish correlations between them. For example, if you observe a
set of variables related to employee motivation, you may use factor analysis to
determine which motivations correlate, then group similar ones into factors.

Why is factor analysis important?

Factor analysis is important because it can help professionals simplify data sets,
making them easier to work with and evaluate. This process is also helpful for
determining which variables correlate enough to form factors and which differ
significantly, which may help you understand the data you've collected more
deeply. Additionally, the process of factor analysis can help limit the number of
observed variables involved in a study.

For instance, if a company conducts a consumer survey that includes 100

questions about personal interests, it may group those questions into four distinct
factors, such as physical activities, entertainment, hobbies and social activities.
Then the data that the company collects may be easier to understand since it's
sorted into four simple categories rather than 100 individual questions.

Related: What Is Statistical Analysis and How Does It Help Businesses?

Who uses factor analysis?

Statisticians commonly use factor analysis to help them derive conclusions from
the data they've collected or that their company provides them. They may use
several methods of factor analysis to determine which factors produce the
greatest accuracy for a particular data set. Data scientists may also use factor
analysis when determining the correlation between variables when working with
data a business has collected. This may help them produce conclusions that help
the company make effective business decisions about products, services and daily
operations.
Related: 7 Types of Statistical Analysis Techniques (With the Statistical
Analysis Process)

See your instant resume report on Indeed

Get recommendations for your resume in minutes

5 methods of conducting factor analysis

Here's a list of five common methods you can use to conduct a factor analysis:

1. Principal component analysis

Principal component analysis involves identifying the variables with the maximum
amount of variance using a covariance matrix. A covariance matrix is a visual
representation of correlations and differences between a set of variables. It
compares each variable by assigning them a score between zero and one, with
zero meaning they're not related and one meaning they're related. If a set of two
variables has a score close to one, it may be possible to include them in the same
factor. Here's an example of a covariance matrix:

Variable A B C D
A 1.00 0.25 0.45 0.95
B 0.25 1.00 0.55 0.65
C 0.45 0.55 1.00 0.75
D 0.95 0.65 0.75 1.00

In the example above, the variable "A" correlates most with "D," so a statistician
might include those in the same factor. In contrast, the variable "A" and "B" have a
low correlation, so the statistician might not include them in the same factor.

Related: An Introductory Guide to Confirmatory Factor Analysis

2. Common factor analysis

Common factor analysis is similar to principal component analysis except that it

focuses on calculating the correlations between variables rather than calculating
variables with the maximum amount of variance between them. Common factor
analysis uses covariance matrices to determine which variables have the highest
amount of correlation and groups those variables together into a factor. For
example, a study on similarities between twins may find a correlation between
variables relating to physical appearance and genetics.

3. Image factoring

Image factoring uses image theory to produce accurate measures of covariance

between variables. Image theory is a behavioral theory that analyzes the
connection between the human cognitive process and decision-making abilities.
This method of factor analysis merges psychological concepts with statistical
correlations, making it especially helpful in psychological or social studies. For
instance, a statistician might use image factoring when evaluating the variables
involved when humans make decisions about their careers.

Related: What Are Qualitative Factors?

4. Least-squares method

The least-squares method involves reducing the sum of squared differences

between correlations of variables. The sum of squared differences is a statistical
measure of how observed variables compare to their predicted values.

There are two types of least-squares methods you can use during factor analysis:
the weighted method and the unweighted method. The weighted least-squares
method involves weighing correlations by the inverse of their uniqueness so that
variables with a high amount of uniqueness have a greater weight. You can then
consider this weight when determining factors. In contrast, the unweighted least-
squares method doesn't account for the weight of uniqueness of variables. For
example, you might use the unweighted least-squares method when many of the
observed variables are similar.

Related: Parameter vs. Statistic: Definitions, Examples and Uses

5. Principal axis factoring

Principal axis factoring involves creating multiple covariance matrices, which can
improve the accuracy of each subsequent matrix. To use this method of factor
analysis, create an initial covariance matrix. Then determine which variables in the
matrix may be factors and place squared correlation coefficients in front of those
factors. This can help you develop a new covariance matrix.
You can repeat this process until there are minimal changes between each
subsequent matrix. Consider setting a goal for the level of accuracy you're seeking.
For example, you may create iterations of matrices until the values in them differ
by less than 0.05.

Is this article helpful?

YesNo

Factor Analysis
Factor analysis is a technique in mathematics that we use to reduce a
larger number into a smaller number. Moreover, in this topic, we will
talk about it and its various aspects.

What is Factor Analysis?

It refers to a method that reduces a large variable into a smaller variable

factor. Furthermore, this technique takes out maximum ordinary
variance from all the variables and put them in common score.

Moreover, it is a part of General Linear Model (GLM) and it believes

several theories that contain no multicollinearity, linear relationship,
true correlation, and relevant variables into the analysis among factors
and variables.
Types of Factor Analysis

There are different methods that we use in factor analysis from the data
set:

1. Principal component analysis

It is the most common method which the researchers use. Also, it

extracts the maximum variance and put them into the first factor.
Subsequently, it removes the variance explained by the first factor and
extracts the second factor. Moreover, it goes on until the last factor.

2. Common Factor Analysis

It’s the second most favoured technique by researchers. Also, it extracts

common variance and put them into factors. Furthermore, this
technique doesn’t include the variance of all variables and is used in
SEM.

3. Image Factoring

It is on the basis of the correlation matrix and makes use of OLS

regression technique in order to predict the factor in image factoring.

4. Maximum likelihood method

It also works on the correlation matrix but uses a maximum likelihood

method to factor.

5. Other methods of factor analysis

Alfa factoring outweighs least squares. Weight square is another

regression-based method that we use for factoring.
Factor loading- Basically it the correlation coefficient for the factors
and variables. Also, it explains the variable on a particular factor shown
by variance.

Eigenvalues- Characteristics roots are its other name. Moreover, it

explains the variance shown by that particular factor out of the total
variance. Furthermore, commonality column helps to know how much
variance the first factor explained out of total variance.

Factor Score- It’s another name is the component score. Besides, it’s

the score of all rows and columns that we can use as an index for all
variables and for further analysis. Moreover, we can standardize it by
multiplying it with a common term.

Rotation method- This method makes it more reliable to understand

the output. Also, it affects the eigenvalues method but the eigenvalues
method doesn’t affect it. Besides, there are 5 rotation methods: (1) No
Rotation Method, (2) Varimax Rotation Method, (3) Quartimax
Rotation Method, (4) Direct Oblimin Rotation Method, and (5) Promax
Rotation Method.

Assumptions of Factor Analysis

Factor analysis has several assumptions. These include:

1. There are no outliers in the data.

2. The sample size is supposed to be greater than the factor.
3. It is an interdependency method so there should be no perfect
multicollinearity between the variables.
4. Factor analysis is a linear function thus it doesn’t require
homoscedasticity between variables.
 5. It is also based on the linearity assumption. So, we can also use
non-linear variables. However, after a transfer, they change into
a linear variable.
6. Moreover, it assumes interval data.

Key Concepts of Factor Analysis

It includes the following key concept:

Exploratory factor analysis- It assumes that any variable or indicator

can be associated with any factor. Moreover, it is the most common
method used by researchers. Furthermore, it isn’t based on any prior
theory.

Confirmatory Factor Analysis- It is used to determine the factors

loading and factors of measured variables, and to confirm what it
expects on the basis of pre-established assumption. Besides, it uses two
approaches:

1. The Traditional Method

2. The SEM Approach