Multivariate Techniques

Factor Analysis for Data Reduction

 Session 11-13 Sessions 14-17 Session 18
Scales & Measurement – Attitude Survey Research – Data Collection Data Preparation Coding, Outliers,
Measurement- Comparative V Non- Methods Questionnaire Design Missing Values
comparative scales Qualitative V Quantitative Methods
Reliability & Validity Tests Observation, Indepth Interviews,
Projective Techniques (Guest
Sessions 10 Sessions from industry experts) Mid
Case Analysis – CEC 2 SPSS Sem Session 19-23
Multivariate Techniques – Introduction
Multiple Regression - Testing of goodness
Sessions 9 SPSS Lab of fit Dummy Variables, SPSS Lab
Analysis & Interpretation of output - Analysis & Interpretation
ANOVA Numerical Case Analysis
STRUCTURE CEC 4
Sessions 5– 8 Business Research
CEC 1 Case Analysis
Formulation of Hypothesis Methods
Assignment of Group Projects Semester II Session 24-28
Research Design – Experimental Designs-Pre , Multivariate Techniques –
Quazi, True & Statistical- ANOVA- Interdependence Techniques Factor
Randomized, Block, Latin Square & Factorial Analysis - SPSS Lab
(SPSS ) Factors affecting internal validity Lab V Analysis & Interpretation
Field Exp Numerical Case Analysis

Session 29-30
Session 1 -4 CEC 5 Presentations - Projects
Introduction to Research- Meaning &
Definition, Significance, Overview of
Methodology . Categories of Research, Session 31-32
Research Types , Process - Identification of Session 33 Other MultivariateTechniques –
Report Writing Discriminant, Cluster
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Problem
2
 Stages of the Research Process
Management
Dilemma
Defining Research
Problem

Formulating Research
Research Report
Hypothesis

Data analysis
Developing Research & interpretation
Proposal

Research Data Refining

framework -Design And Preparation

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Data Collection
3
Session Plan

 Factor Analysis
 Application Areas
 Recommended Use
 Steps in Factor Analysis
 Analysis & Interpretation of Output
 More on Communalities/Surrogate Variables
 SPSS Lab

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Classification of Multivariate Statistical Techniques

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Classification of Multivariate Techniques (Contd.)
Dependence Techniques
• One or more variables can be identified as dependent variables and the remaining as independent
variables
• Choice of dependence technique depends on the number of dependent variables involved in
analysis

Interdependence Techniques
• Whole set of interdependent relationships is examined
• Further classified as having focus on variable or objects

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Factor Analysis
 Suppose we ask a respondent who is likely to buy a 4-wheeler to rate the importance that he
would give to various aspects of a 4-wheeler like:
 Mileage
 Price
 Smooth ride
 Cost of spare parts
 Servicing locations
 Cooling effect
 Leg space and so on

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Factor Analysis
 Suppose he gives higher rating to following attributes:
 Leg space

 Smooth ride

 Cooling effect

 Interiors

What is he looking for?

He is looking for comfort

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Factor Analysis
Similarly, if the respondent gives high scores on following attributes:
 Price of car
 Mileage
 Price of spare parts
 Interest on loan
What does he want?
He wants economy

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Factor Analysis Model

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Variables and Factors
 Thus ‘comfort’, ‘economy’ are not single measurable entities but complex constructs that
are derived from many variables
 Such complex constructs are called Factors. Identifying such factors greatly simplifies
understanding of complex phenomenon
 Factor analysis is a tool that is used to identify factors from many inter-related variables.
Therefore, it is also called as data reduction technique
 It is a multivariate technique where there is no distinction between dependent and
independent variables. ( Recall the chart)
 All the variables under investigation are analysed together
 Factors that explain most part of the variations of the original set of data are extracted
 Helps in identifying the underlying structure of the data

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Factor Analysis Contd..
 Factor Analysis is a set of techniques used for understanding variables by grouping them into
“factors” consisting of similar variables
 It can also be used to confirm whether a hypothesized set of variables groups into a factor or not
 It is most useful when a large number of variables needs to be reduced to a smaller set of “factors”
that contain most of the variance of the original variables
 Factors extracted are linear combination of variables
 Generally, Factor Analysis is done in two stages, called
• Extraction of Factors and
• Rotation of the Solution obtained in stage 1
 Factor Analysis is best performed with interval or ratio-scaled variables
 The factors extracted are statistically independent.
 Thus the problem of multicollinearity in regression model can be solved using factor analysis.

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Steps in Factor Analysis
 Step 1: Prepare statements:
 Respondents are given statements related to the subject & response is obtained

on Graphic rating scale. Often ‘Likert scale’ is used.

 The responses are converted into scores

 It can also be converted to Z Scores

 Factor analysis is run on scores/Z scores

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Pre Conditions for Factor Analysis
 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.

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Establishing The Strength Of Factor Analysis Solution
 Step 2: To check goodness of fit
 Sample Size taken for factor analysis should normally be more than 5 times the
number of variables for analysis
 Following are three outputs that indicate appropriateness of model:
 Correlation matrix
 Bartlett’s test of sphericity
 Kaiser-Meyre-Olkin(KMO) statistic

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Interpretation
 Correlation matrix:
 Non-diagonal values of correlation matrix close to zero show variables in row &
column are not related.
 If such values are more, factor analysis will not be appropriate for the data.

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Interpretation of Bartlett’s test of sphericity
 Bartlett’s test of sphericity can be used to test the null hypothesis that correlation matrix
is Identity matrix.
 H0- The variables are uncorrelated in the population: in other words, the population
correlation matrix is an identity matrix.
 H1- Variables are correlated , Matrix is not identity matrix
 Rejection of this hypothesis indicates the appropriateness of factor analysis
 If the p value is < .05, then reject the null hypothesis and it can be concluded that
correlation matrix is not identify matrix. Factor analysis would prove effective.

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Interpretation of KMO value
 Kaiser-Meyer-Olkin (KMO) value also tells us whether factor analysis is appropriate for
data.
 If KMO >= 0.50 factor analysis is appropriate for the data

 Kaiser-Meyer-Olkin (KMO) measure of sampling adequacy.

 It is an index used to examine the appropriateness of factor analysis .
 High values (between 0.5 and 1.0) indicate factor analysis is appropriate.
 Values below 0.5 imply that factor analysis may not be appropriate

 The KMO is nothing but taking reliability measures of multiple split offs

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Step 3 – Extraction of Factors
 Determines Number of factors to be extracted
 Factors are linear combinations of original variables
 Maximum number of factors equals no. of variables
 Purpose is to reduce variables to fewer no. of factors
 Popular method is Principal Component Analysis.
 Based on the Concept of Eigen Values (the sum of the squares of factor loadings).
 Higher the eigen value of the factor, higher is the amount of variance explained by
the factor
 Extract least number of factors to explain maximum variance

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Eigen Values
 Information captured by a factor is called its eigenvalue.
 It is computed as sum of squares of factor loadings on the
factor.

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An Illustration….

Variable Factor 1 Factor 2

X1 0.8045 -0.2578

X2 0.7245 0.2354

X3 -0.2585 0.9541
Eigenvalue (0.8045)2+(0.7245)2+(-0.2585)2 (-0.2578)2 +
= 1.2389 (0.2354)2 + 0.9541)2
(Sum of
= 1.0322
squares)

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Extraction of Factors
 Each original variable has Eigen value =1 as every variable would form a factor in the
initial output.
 By default, number of factors = number of variables

 Factors with eigen value more than 1 are considered

 After the first stage during extraction only factors with eigen value >= 1 are retained
 Factors with eigen value < 1 are no better than a single variable
 The number of factors extracted is determined so that cumulative % of variance extracted
reaches a satisfactory level ( at least 60% ) for successfully taking out the most important
of variables as factors.

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Scree Plot- For Factor Extraction
 A scree plot is a plot of the Eigen values against the number of factors in order of
extraction.
 The Shape of the plot is used to determine the number of factors
 The plot has a distinct break between steep slope of factors with large eigen
values & a gradual trailing off associated with rest of the factors
 The gradual trailing off is referred to as Scree
 The point at which scree begins denotes the No. of factors
 Generally number of factors determined by scree plot is 1 or 2 more than
determined by eigen values

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Scree Plot- a plot of the Eigenvalues against the number of factors in order of
extraction.
3.0

2.5

2.0

Eigenvalue 1.5

1.0

0.5

0.0
1 2 3 4 5 6
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Component Number
24
Stage II -Step 3- Varimax Rotation
 The rotated factor matrix comes as output of stage II when we request the
computer software to perform rotation & give us a rotated factor matrix
 The popular method of rotation is Orthogonal(varimax)
 The rotation keeps the factors orthogonal (independent) in relation to each other.
 Rotation places the factors into positions that only the variables which are distinctly
related to a factor will be associated.

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Step 3: Rotate axis: To understand rotation of axis

0.6

0.5

0.4

0.3

0.2

0.1

0
-0.6 -0.4 -0.2 0 0.2 0.4 0.6

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Varimax Rotation

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Rotation Explained
By rotating axis, points have come closer to new X & Y axis. Co-ordinates of points w.r.t. rotated axis
will be such that either X co-ordinate will be high or Y co-ordinate will be high but not both.
By rotating axis, we may get factor loadings high only on one factor and low on other factors. Such
factor loadings are easy to interpret.
‘Varimax’ rotation of axis is preferred method of rotation
 Rotation does not affect communalities & % of total variance explained. However % of variance
accounted for by each factor does change . It redefines the factors in order to make sharper
distinctions in the meaning of the factors
 The varimax rotation maximises the variance of the loadings
 In factor rotation smallest loadings tend towards 0 & largest loadings tend towards 1.
 The rotation is called orthogonal rotation if the axes are maintained at right angles.

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The Factor/component Matrix
 The factor matrix ( whether unrotated or rotated ) gives us the loadings of each
variable on each of the extracted factors
 This is similar to correlation matrix with loadings having values between 0 to 1
 Values close to 1 represent high loadings & close to 0 low loadings
 The objective is to find variables which have a high loading on one factor low
loadings on other factors.
 If Factor 1 is loaded highly by variables ,say, 3.6 & 10,then, it is assumed that
Factor 1 is a linear combination of variables 3,6 & 10
 It is given a suitable name representing essence of original variables (3,6 & 10)

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Step 4-Interpret and Give a suitable name
 After extraction the next task is to interpret & name the factors
 This is done by identifying which factors are associated with which original
variables
 The factor/component matrix is used for this purpose
 The original factor matrix is unrotated & comes as output of stage I but normally
rotated one is used
 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.

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Step 4 Surrogate Variables & Factor Names

 By examining the factor matrix, one could select for each factor the variable with the
highest loading on that factor. That variable could then be used as a surrogate variable for
the associated factor.
 However, the choice is not as easy if two or more variables have similarly high loadings.
In such a case, the choice between these variables should be based on theoretical and
measurement considerations.
 By combining variables with high factor loadings, irrespective of sign, will give us
factors.
 Based on variables that get combined, we name the factor. Naming the factor is

everybody’s judgment

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Step 5 -Factor Analysis – Linear combination of variables

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

where
Fi = estimate of i th factor
Wi = weight or factor score coefficient
k = number of variables

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Weights Assigned
 It is possible to select weights or factor score coefficients so that the first factor
explains the largest portion of the total variance.
 Then a second set of weights can be selected, so that the second factor accounts
for most of the residual variance, subject to being uncorrelated with the first factor.
 This same principle could be applied to selecting additional weights for the
additional factors.

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Interpretation Communality – h2

 Communality.. Once number of factors are decided, one can find information from each
variable captured by selected factors. This is called communality of each variable
 This is the proportion of variance explained by the common factors for each variable .It
shows how much of each variable is accounted for by underlying factors taken together.
 It is sum of squares of factor loadings of the variable
 It equals sum of squares of factor loadings for that variable. It ranges from 0 to 1.
 In factor analysis the sum of the initial communality values of variables will be equal to
total number of variables considered for analysis

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Communality – An Illustration

Variables Factor 1 Factor 2 Communality

X1 0.8045 -0.2578 0.7137

X2 0.7245 0.2354 0.5803

X3 -0.2585 0.9541 0.9771

Communality of X1 = (0.8045)2+(-.2578)2=0.7137.

It means out of total variance (information) of 1 unit of X1, 0.7137 is captured by

common factors F1 and F2. Remaining 0.2863 is unique to X1, which could not be
captured by common factors. It is U1in the model

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Eigen Values & Communalities
Variable Factor 1 Factor 2 Communality

X1 0.8045 -0.2578 0.7137

X2 0.7245 0.2354 0.5803
X3 -0.2585 0.9541 0.9771
Eigenvalue 1.2389 1.0322

From above , X1 & X2 can be combined with Factor 1 and X3 with Factor 2. For such
allocation we would prefer factor loadings of a variable high on only one factor. This
can be done with rotation of axis

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Factor Analysis- A Complete Illustration
 In business research, a common application area of Factor Analysis is to
understand underlying motives of consumers who buy a product category or
a brand
 For example, we assume that a two wheeler manufacturer is interested in
determining which variables his potential customers think about when they
consider his product
 Let us assume that twenty two-wheeler owners were surveyed by this
manufacturer (or by a marketing research company on his behalf). They were
asked to indicate on a seven point scale (1=Completely Agree, 7=Completely
Disagree), their agreement or disagreement with a set of ten statements relating to
their perceptions and some attributes of the two-wheelers.
 The objective of doing Factor Analysis is to find underlying "factors" which
would be fewer than 10 in number, but would be linear combinations of some of
the original 10 variables
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An Illustration….
 The research design for data collection can be stated as follows-
 Twenty 2-wheeler users were surveyed about their perceptions and image attributes of the vehicles they
owned. Ten questions were asked to each of them, all answered on a scale of 1 to 7 (1= completely
agree, 7= completely disagree).
 1. I use a 2-wheeler because it is affordable.

 2. It gives me a sense of freedom to own a 2-wheeler.

 3. Low maintenance cost makes a 2-wheeler very economical in the long run.

 4. A 2-wheeler is essentially a man’s vehicle.

 5. I feel very powerful when I am on my 2-wheeler.

 6. Some of my friends who don’t have their own vehicle are jealous of me.

 7. I feel good whenever I see the ad for 2-wheeler on T.V., in a magazine or on a hoarding.

 8. My vehicle gives me a comfortable ride.

 9. I think 2-wheelers are a safe way to travel.

 10. Three people should be legally allowed to travel on a 2-wheeler.

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 The input data containing responses of twenty
respondents to the 10 statements are in Appendix 1, in
the form of a 20 Row by 10 column matrix
(reproduced below).

QUESTION NO.
S. 1 2 3 4 5 6 7 8 9 10
No.
1 1 4 1 6 5 6 5 2 3 2
2 2 3 2 4 3 3 3 5 5 2
3 2 2 2 1 2 1 1 7 6 2
4 5 1 4 2 2 2 2 3 2 3
5 1 2 2 5 4 4 4 1 1 2
6 3 2 3 3 3 3 3 6 5 3
7 2 2 5 1 2 1 2 4 4 5
8 4 4 3 4 4 5 3 2 3 3
9 2 3 2 6 5 6 5 1 4 1
10 1 4 2 2 1 2 1 4 4 1

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 QUESTION NO.
S. 1 2 3 4 5 6 7 8 9 10
No.
11 1 5 1 3 2 3 2 2 2 1
12 1 6 1 1 1 1 1 1 2 2
13 3 1 4 4 4 3 3 6 5 3
14 2 2 2 2 2 2 2 1 3 2
15 2 5 1 3 2 3 2 2 1 6
16 5 6 3 2 1 3 2 5 5 4
17 1 4 2 2 1 2 1 1 1 3
18 2 3 1 1 2 2 2 3 2 2
19 3 3 2 3 4 3 4 3 3 3
20 4 3 2 7 6 6 6 2 3 6

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Steps 1 & 2

 Step1– Already data is collected and coded

 Step 2: To check goodness of fit
 Following are three outputs that indicate appropriateness of model:
 Correlation matrix
 Bartlett’s test of sphericity
 Kaiser-Meyre-Olkin(KMO) statistic

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SPSS Output & Interpretation

Interpret ?

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Step 3
 As a first stage we request the software package used (SPSS,
Statistica, etc.) to EXTRACT factors with an Eigen Value of 1
or higher.
 The method requested is the PRINCIPAL COMPONENTS

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 Interpretation of the Output

1. (The first step in interpreting the output is to look at

the factors extracted, their eigen values and the
cumulative percentage of variance
Final Statistics

Variable Commu * Factor Eigenval Pact of Cum

nality ue Var Pct
VAR00001 .72243 * 1 3.88282 38.8 38.8
VAR00002 .45214 * 2 2.77701 27.8 66.6
VAR00003 .73056 * 3 1.37475 13.7 80.3
VAR00004 .94488 *
VAR00005 .95038 *
VAR00006 .91376 *
VAR00007 .95474 *
VAR00008 .79869 *
VAR00009 .77745 *
VAR00010 .78946 *

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 1. We note that three factors have been extracted, based
on our criterion that only Factors with eigen values of 1
or more should be extracted. We see from the Cum.
Pct. (Cumulative Percentage of Variance Explained)
column in that the three factors extracted together
account for 80 percent of the total variance
(information contained in the original ten variables).
This is a pretty good bargain, because we are able to
economise on the number of variables (from 10 we
have reduced them to 3 underlying factors), while we
lost only about 20 percent of the information content
(80 percent is retained by the 3 factors extracted out of
the 10 original variables).
2. This represents a reasonably good solution for our
problem.

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SPSS Output/Factor Matrix
Factor 1 Factor 2 Factor 3

VAR00001 .17581 .66967 .49301

VAR00002 -.13577 -.60774 .25369

VAR00003 -.10651 .81955 .21827

VAR00004 .96647 -.03627 -.09745

VAR00005 .95098 .16594 -.13593
VAR00006 .95184 -.08442 -.02522
VAR00007 .97128 .09591 -.04636
VAR00008 -.32171 .77498 -.03757

VAR00009 -.06890 .73502 -.48213

VAR00010 .16143 .31862 -.81356

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 Step 4 Now, we try to interpret what these 3
extracted factors represent. This we can
accomplish by looking the two tables, the
rotated and unrotated factor matrices.
1.
Rotated Factor Matrix
Factor 1 Factor 2 Factor 3
VAR00001 .13402 .34749 .76402
VAR00002 -.18143 -.64300 -.07596
VAR00003 -.10944 .62985 .56742
VAR00004 .96986 -.06383 -.01338
VAR00005 .96455 .13362 .04660
VAR00006 .94544 -.13868 .02600
VAR00007 .97214 .02862 .09411
VAR00008 -.26169 .85203 .06517
VAR00009 .00891 .87772 -.08347
VAR00010 .07209 -.10990 .87874

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The Variables…..
 1. I use a 2-wheeler because it is affordable.
 2. It gives me a sense of freedom to own a 2-wheeler.
 3. Low maintenance cost makes a 2-wheeler very economical in the long run.
 4. A 2-wheeler is essentially a man’s vehicle.
 5. I feel very powerful when I am on my 2-wheeler.
 6. Some of my friends who don’t have their own vehicle are jealous of me.
 7. I feel good whenever I see the ad for 2-wheeler on T.V., in a magazine or on a hoarding.
 8. My vehicle gives me a comfortable ride.
 9. I think 2-wheelers are a safe way to travel.
 10. Three people should be legally allowed to travel on a 2-wheeler.

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 1. Step 4 & 5 – Naming of factors
2. Looking at the rotated factor matrix, we notice that
variable nos. 4, 5, 6 and 7 have loadings of 0.96986,
0.96455, 0.94544 and 0.97214 on factor 1 (we look down
the Factor 1 column and look for high loadings close to
1.00). This suggests that Factor 1 is a combination of
these four original variables. The unrotated matrix also
suggests a similar grouping. Therefore, there is no
problem interpreting factor 1 as a combination of “a
man’s vehicle” (statement in variable 4), “feeling of
power” (variable 5), “others are jealous of me” (variable
6) and “feel good when I see my 2-wheeler ads”.
3. At this point, the researcher’s task is to find a suitable
phrase which captures the essence of the original
variables which form the underlying concept or “factor”.
In this case, factor 1 could be named “male ego”, or
“machismo”, or “pride of ownership” or something similar.
With the same mathematical output, interpretations of
different researchers may differ.

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 Naming of Factors contd..
1. Now we will attempt to interpret factor 2. We look down the column
for Factor 2, and find that variables 8 and 9 have high loadings of
0.85203 and 0.87772, respectively. This indicates that factor 2 is a
combination of these two variables.

2. But if we look at the unrotated factor matrix, a slightly different

picture emerges. Here, variable 3 also has a high loading on factor 2,
along with variables 8 and 9. It is left to the researcher which
interpretation he wants to use, as there are no hard and fast rules.
Assuming we decide to use all three variables, the related statements
are “low maintenance”, “comfort” and “safety” (from statements 3, 8
and 9). We may combine these variables into a factor called “utility” or
“functional features” or any other similar word or phrase which
captures the essence of these three statements / variables.
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Interpretation
 . For interpreting Factor 3, we look at the column labelled factor 3 and find that variables 1
and 10 are loaded high on factor 3.
 According to the unrotated factor matrix , only variable 10 loads high on factor 3.
Supposing we stick to rotated matrix, then the combination of “affordability’ and “cost saving
by 3 people legally riding on a 2-wheeler” give the impression that factor 3 could be
“economy” or “low cost”.
 4. We have now completed interpretation of the 3 factors with eigen values of 1 or more. We
will now look at some additional issues which may be of importance in using factor analysis.

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Analysis & Interpretation

 We must guard against the possibility that a variable may load highly on more
than one factors. Strictly speaking, a variable should load close to 1.00 on one
and only one factor, and load close to 0 on the other factors. If this is not the
case, it indicates that either the sample of respondents have more than one
opinion about the variable, or that the question/ variable may be unclear in its
phrasing.
 The other issue important in practical use of factor analysis is the answer
to the question ‘what should be considered a high loading and what is not a
high loading?” Here, unfortunately, there is no clear-cut guideline, and many a
time, we must look at relative values in the factor matrix. Sometimes, 0.7 may
be treated as a high value, while sometimes 0.9 could be the cutoff for high
values.

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Analysis & Interpretation –Communality

 . The proportion of variance in any one of the original variables which is

captured by the extracted factors is known as Communality.
 For example, from the table it is clear that after 3 factors were extracted and
retained, the communality is 0.72243 for variable 1, 0.45214 for variable 2
and so on (from the column labelled communality)
 This means that 0.72243 or 72.24 percent of the variance (information
content) of variable 1 is being captured by our 3 extracted factors together.
Variable 2 exhibits a low communality value of 0.45214. This implies that
only 45.214 percent of the variance in variable 2 is captured by our extracted
factors.

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Analysis & Interpretation – Surrogate Variables

 Selection of a single variable with the highest factor loading to

represent a factor in the data reduction stage instead of using
a summated scale or factor score is called the surrogate
variable

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Analysis & Interpretation
 This may also partially explain why variable 2 is not appearing in our final
interpretation of the factors (in the earlier section). It is possible that variable 2 is
an independent variable which is not combining well with any other variable, and
therefore should be further investigated separately. “Freedom” could be a
different concept in the minds of our target audience.

 It is recommended that we use the rotated factor matrix (rather than unrotated
factor matrix) for interpreting factors, particularly when we use the principal
components method for extraction of factors.

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SPSS Input/Output …
 Factor scores. Factor scores are composite scores estimated for
each respondent on the derived factors

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SPSS & AMOS
AMOS:
 A powerful structural equation modeling and confirmatory factor analysis tool that
specifies and fits your models easily and visually without using matrices.
 Unveil more critical information than with conventional methods such as regression
or exploratory factor analysis.

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Factor Analysis – A Summary
Problem formulation

Construction of the Correlation Matrix

Method of Factor Analysis

Determination of Number of Factors

Rotation of Factors

Interpretation of Factors

Calculation of Selection of
Factor Scores Surrogate Variables

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SPSS Windows

To select this procedures using SPSS for Windows click:

Analyze>Dimension Reduction>Factor …

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Recap….

 Factor Analysis
 Application Areas
 Recommended Use
 Steps in Factor Analysis
 Analysis & Interpretation of Output
 More on Communalities
 SPSS Lab

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Q&A

Any Questions?

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