Advanced Methods of Data

Analysis
Session 11 – 12

Program: PT MBA
Trim: V
Instructor: Dr. Abhinav Sharma
 Multiple Discriminant Analysis (MDA)
• Appropriate statistical techniques when:
 the dependent variable is a categorical (nominal or nonmetric) variable with two or
more levels, and
 The independent variables are metric variables.
• Variate (aka discriminant function):
 linear combination of the two (or more) independent variables to discriminate best
between the objects (persons, firms, etc.) in the groups defined a priori.

 Discriminant score (i.e., discriminant Z score or Z score) is calculated for each

object in the analysis.

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 Multiple Discriminant Analysis (MDA)
• Hypothesis:
Group means (centroids) of the discriminant Z scores (calculated from a set of
independent variables) for two or more groups are equal.

Well-Defined Groups A and B Poorly-Defined Groups A and B

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 Multiple Discriminant Analysis (MDA)
• An example:
Perceptions of three product characteristics (X1 – Durability, X2 – Performance, X3
– Style) were collected from individuals who indicated they “Would Purchase”
versus “Would Not Purchase”.

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 Multiple Discriminant Analysis (MDA)
No individual variable will separate perfect groups

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 Multiple Discriminant Analysis (MDA)
Three potential functions:

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 Multiple Discriminant Analysis (MDA)
Another Example:

Interviews of 15 customers of a major

competitor where they were asked
their probability of switching
suppliers on a three-category scale
(“definitely switch,” “undecided,” and
“definitely not switch”).

The customers also rated the

competitor on two characteristics:
price competitiveness (X1) and service
level (X2).

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 Multiple Discriminant Analysis (MDA)
Three groups example:
• Neither of the two variables provides perfect discrimination of the three groups.
• Calculating two discriminant functions (see below) provides perfect
discrimination

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 Multiple Discriminant Analysis (MDA)

Objectives:

• Determine if statistically significant differences exist between the two (or more)
a priori defined groups based on variate formed from independent variables

• Identify the relative importance of each of the independent variables in

predicting group membership.

• Develop procedures for classifying objects (individuals, firms, products, etc.)

into groups on the basis of their scores on a set of independent variables.

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 Multiple Discriminant Analysis (MDA)

Dependent variable:

• Nonmetric and mutually exclusive, representing groups of objects that are

expected to differ on the independent variables.

Independent variables

• Must identify differences between at least two groups

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 Multiple Discriminant Analysis (MDA)
Sample Consideration
• Overall Sample Size
o Ratio of 20 observations for each predictor variable.
o Minimum size recommended is five observations per independent variable.
• Sample Size per Category
o Have at least one more observation per group than the number of independent
variables, but the objective should be at least 20 cases per group.
o Strive for relatively equal sizes per group.
• Division of the Sample
o Large enough sample to divide it into an estimation and holdout sample, each
meeting the above requirements.
o If not possible to employ split-samples, apply “hold-out” procedures for validation
purposes.

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 Multiple Discriminant Analysis (MDA)
Assumptions
Impacts on Estimation and Classification
• Examine the independent variables for univariate normality as it is the most direct
remedy for ensuring both multivariate normality and equality of covariance matrices.
• Assess the equality of covariance matrices with the Box’s M test, but apply a
conservative significance level of .01 and become even more conservative as the
analysis becomes more complex, e.g., with a larger number of groups and/or
independent variables.
• Linear relationships.
• Elimination of outliers.
Impacts on Interpretation
• Multicollinearity among the independent variables can markedly reduce the estimated
impact of independent variables in the derived discriminant function(s), particularly if
a stepwise estimation process is used.

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 Multiple Discriminant Analysis (MDA)
Estimation method:
Stepwise Estimation
• Independent variables are entered into the discriminant function one at a time.
• Process only includes significant discriminating variables in the model.
• Particularly useful when considering a large number of independent variables.

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