Factor Analysis

K.B. Gupta
Indian Institute of Management
Lucknow

“Factor ???!”
• Imagine yourself as...

– a College student and you find that “X”...

• gives you flowers (or cards)
• listens to your problems
• reads your manuscripts/provides solution
• gazes deeply into your soul
• laughs at your jokes

... what does “X” have towards you ?

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 “Factor ???!”
• Now imagine yourself as...

– a car salesman observing a customer...

• knocks at the body of the car
• inspects the material of the bumper
• asks you more about ABS brakes, side-impact
beams

... what is he looking for in a car ?

Need for “Factoring”

• Love or safety are not single measurable
variables...

...but are constructs derivable from measurement of

other, directly observable variables

• Identification of the underlying dimension

(love or safety) simplifies description or
understanding of a complex perceptual
issues

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 Factor Analysis

• Technique that serves to combine variables

to create new factors
• Purpose
– To identify underlying constructs in the data
– To reduce the number of variables to a more
manageable set

Methodology
Two commonly employed factor analytic
procedures
Principal Component Analysis
– Used when the need is to summarize
information in a larger set of variables to a
smaller set of factors
Common Factor Analysis
– Used to uncover underlying dimensions
surrounding the original variables

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Principal Component Analysis
• The objective of factor analysis is to represent each of
these variables as a linear combination of a smaller set of
factors
• This can be represented as
X1 = I11F1 + I12F2 + e1
X2 = I21F1 + I22F2 + e2
.
.

Xn = In1F1 + In2F2 + en
• Where
X1, ... xn represent standardized scores
F1,F2 are the two standardized factor scores
I11, i12,....In2 are factor loadings
E1,...E5 are error variances

Factor
• A variable or construct that is not directly observable
but needs to be inferred from the input variables
Factor Scores
• Values of each factor underlying the variables

Factor Loadings
• Correlations between the factors and the original
variables

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Communality
• The amount of the variable variance that is explained
by the factor

Factor Rotation
• Factor analysis can generate several solutions for any
data set. Each solution is termed a particular factor
rotation and is generated by a particular factor rotation
scheme

How Many Factors?

• Rule of Thumb
– All included factors (prior to rotation) must explain at
least as much variance as an "average variable"
• Eigenvalues Criteria
– Eigenvalue represents the amount of variance in the
original variables associated with a factor
– Sum of the square of the factor loadings of each variable
on a factor represents the eigen value
– Only factors with eigenvalues greater than 1.0 are
retained

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Scree Plot Criteria
• Plot of the eigenvalues against the number of factors in
order of extraction
• The shape of the plot determines the number of factors

Percentage of Variance Criteria

• Number of factors extracted is determined when the
cumulative percentage of variance extracted by the
factors reaches a satisfactory level