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23 February 2008 Prepared by C Y Nimkar 1

Introduction

• 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

23 February 2008 Prepared by C Y Nimkar 2

Introduction • 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 23 February 2008 Prepared by C Y Nimkar 3 .

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 23 February 2008 Prepared by C Y Nimkar 4 . Introduction Similarly.

Therefore. Introduction • Thus ‘comfort’. ‘economy’ are not single measurable entities but complex constructs that are derived from many variables • Such complex constructs are called Factors. it is also called as data reduction technique 23 February 2008 Prepared by C Y Nimkar 5 . 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.

Factor analysis model 23 February 2008 Prepared by C Y Nimkar 6 .

• His ism Leg space (X1) = w1 (comfort) + w2 (economy) + U1 Leg space = 23 February 2008 Prepared by C Y Nimkar 7 .

• U1 is that part of leg space variable not expressed by factors ‘comfort’ & ‘economy’. Since leg space is more related to comfort than economy. w1 will have higher value than w2. Factor analysis model Leg space (X1) = w1 (comfort) + w2 (economy) + U1 • w1 is the index of relation between leg space & comfort and w2 between leg space & economy. It is uniqueness of the variable 23 February 2008 Prepared by C Y Nimkar 8 .

23 February 2008 Prepared by C Y Nimkar 9 .… are called common factors or simply factors. … are called factor loadings & F1. original variable can be expressed as a linear combination of factors as below: Xi = wi1 (F1) + wi2 (F2)+………+ wip (Fp)+Ui wi1. wi2. F2. Ui is the part of Xi not explained by factors. Factor analysis model In general.

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 – Factor analysis is run on scores 23 February 2008 Prepared by C Y Nimkar 10 .

Steps in Factor analysis • 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 23 February 2008 Prepared by C Y Nimkar 11 .

Steps in Factor analysis – Correlation matrix: • Non-diagonal values of correlation matrix close to zero show variables in row & column are not related. 23 February 2008 Prepared by C Y Nimkar 12 . factor analysis will not be appropriate for the data. If such values are more.

If KMO >= 0. If null hypothesis is accepted.50 factor analysis is appropriate for the data 23 February 2008 Prepared by C Y Nimkar 13 . Steps in Factor analysis – Bartlett’s test of sphericity can be used to test the null hypothesis that correlation matrix is Identity matrix. factor analysis is not suitable to data – Kaiser-Meyer-Olkin (KMO) value also tells us whether factor analysis is appropriate for data.

Steps in Factor analysis Let us consider following factor loading matrix (matrix of w’s): Variables Factor 1 Factor 2 X1 0.8045 -0.2354 X3 -0.2578 X2 0.2585 0.7245 0.9541 23 February 2008 Prepared by C Y Nimkar 14 .

9541 Here the model will be: X1 = 0.7245 F1 + 0.2354 X3 -0.2585 F1 + 0. Steps in Factor analysis Variables Factor 1 Factor 2 X1 0.8045 -0.7245 0.2354 F2+U2 X3 = -0.2578 F2+U1 X2 = 0.9541 F2+U3 23 February 2008 Prepared by C Y Nimkar 15 .2585 0.2578 X2 0.8045 F1 – 0.

• It is computed as sum of squares of factor loadings on the factor. Steps in Factor analysis • Information captured by a factor is called its eigenvalue. 23 February 2008 Prepared by C Y Nimkar 16 .

7245)2+(-0.7245 0.2585)2 (-0.8045)2+(0.9541 Eigenvalue (0.0322 squares) 23 February 2008 Prepared by C Y Nimkar 17 . Steps in Factor analysis Variable Factor 1 Factor 2 X1 0.2585 0.2354)2 + 0.2578)2 + = 1.2578 X2 0.2354 X3 -0.8045 -0.2389 (0.9541)2 (Sum of = 1.

of factors: – By default. Steps in Factor analysis • Step 3: To decide no. number of factors = number of variables – Factors with eigen value more than 1 are considered 23 February 2008 Prepared by C Y Nimkar 18 .

one can find information from each variable captured by selected factors – This is called communality of each variable – It is sum of squares of factor loadings of the variable 23 February 2008 Prepared by C Y Nimkar 19 . Steps in Factor analysis – Once number of factors are decided.

7137 X2 0.9771 • Communality of X1 = (0.2578 0.2354 0.7245 0.2578)2=0.2863 is unique to X1. which could not be captured by common factors.2585 0. Variables Factor 1 Factor 2 Communality X1 0. – It means out of total variance (information) of 1 unit of X1. 0.8045 -0.8045)2+(-0.7137. Remaining 0.9541 0. It is U1in the model 23 February 2008 Prepared by C Y Nimkar 20 .7137 is captured by common factors F1 and F2.5803 X3 -0.

Steps in Factor analysis Variable Factor 1 Factor 2 Communality X1 0.9541 0.7137 X2 0.2578 0.2389 1.5803 X3 -0.0322 From above .7245 0. X1 & X2 can be combined with Factor 1 and X3 with Factor 2.9771 Eigenvalue 1. For such allocation we would prefer factor loadings of a variable high on only one factor.2354 0. This can be done with rotation of axis 23 February 2008 Prepared by C Y Nimkar 21 .8045 -0.2585 0.

let us see the graph in next slide 23 February 2008 Prepared by C Y Nimkar 22 . Steps in Factor analysis • Steps 4: Rotate axis: – To understand rotation of axis.

1 0 -0.4 0.5 0.6 0.6 -0.2 0 0.2 0. Steps in Factor analysis 0.4 -0.2 0.6 23 February 2008 Prepared by C Y Nimkar 23 .4 0.3 0.

5 0.6 23 February 2008 Prepared by C Y Nimkar 24 .6 0.6 -0.4 0.4 -0.1 0 -0. Steps in Factor analysis 0.2 0.2 0 0.2 0.4 0.3 0.

– By rotating axis. Co-ordinates of points w. rotated axis will be such that either X co-ordinate will be high or Y co- ordinate will be high but not both.t. we may get factor loadings high only on one factor and low on other factors. Steps in Factor analysis – By rotating axis.r. points have come closer to new X & Y axis. Such factor loadings are easy to interpret – ‘Varimax’ rotation of axis is preferred method of rotation 23 February 2008 Prepared by C Y Nimkar 25 .

Steps on Factor analysis • Step 5: Name factors: – By combining variables with high factor loadings. we name the factor. irrespective of sign. will give us factors – Based on variables that get combined. Naming the factor is everybody’s judgment 23 February 2008 Prepared by C Y Nimkar 26 .

END OF FACTOR ANALYSIS 23 February 2008 Prepared by C Y Nimkar 27 .

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