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Factor Analysis
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What is Factor Analysis
Data Reduction Technique
A factor is a weighted sum of the variables
The goal is to summarize the information in a larger
number of correlated variables into a smaller number of
factors that are not correlated with each other.
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Graphical Intuition: Factor Analysis works
when data are correlated
C B
A D
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Graphical Intuition: Factor Analysis will not work
when variables are uncorrelated
Figure 2
1.0
0.9
0.8
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0.6
0.5
Y
0.4
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0.2
0.1
0.0
0.0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1.0
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When to do Factor Analysis in
business research?
Applications
Eliminating Multicollinearity problems in
Regression
Measuring managerially useful constructs
Intelligence, Leadership Skills, Customer
satisfaction
Usefulin constructing perceptual maps of
products that are useful in positioning studies
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Perceptual Map… Example
Perceptual Map for Cars
1.5
Dodge Neon
VW Golf 1
Economy 0.5
Camry Taurus
0
-1.5 -1 -0.5 0 0.5 1 1.5 2
-0.5
-1
Lexus ES 300
-1.5 BMW325
Fashion
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Applying Factor Analysis: Evaluating
MBA Applications
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Applying Factor Analysis:
Evaluating MBA Applications
Variables available
GPA
GMAT score Which variables
Scholarships, fellowships won
do you believe
Evidence of Communications skills
Prior Job Experience
correlate with
Organizational Experience intelligence and
Other extra curricular achievements teamwork and
leadership skills?
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Data…
20
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Quick and dirty sense of the data: Looking at
the correlation matrix
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First Step: Do Principal Component Analysis
(PCA) to select # of factors
so on…
Variance Explained by Factors
With standardized variables each variable has a variance
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SPSS Output of PCA: Eigen Analysis
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Second Step: Do Factor Analysis with
number of factors selected from Step 1
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Why not Unrotated Factor Loadings?
Variable’s correlation with the factors
Component Matrixa
Component
1 2
gmat .891 -.388
gpa .766 -.586
fellow .777 -.552
comm .883 .052
jobex .683 .662
organze .518 .730
extra .493 .705
Extraction Method: Principal Component Analysis.
a. 2 components extracted.
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Interpreting Factors: Looking at
Loading Plot without Rotations
Loading Plot of GMAT-Extra without Rotations
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Rotated Factor Loadings: Variable’s
correlation with the factors
Rotated Factor Loadings and Communalities
Varimax Rotation a
Rotated Component Matrix
Component
1 2
gmat .954 .186
gpa .963 -.048
fellow .953 -.014
comm .698 .543
jobex .187 .933
organze .013 .895
extra .007 .860
Extraction Method: Principal Component Analysis.
Rotation Method: Varimax with Kaiser Normalization.
a. Rotation converged in 3 iterations.
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Interpreting Factors: Looking at
Loading Plot with Rotation
Loading Plot of GMAT-Extra with Rotations
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Naming Factors
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How did applicants score on Intelligence and
Leadership Factors
Component Score Coefficient Matrix
Component
1 2
gmat .293 -.006
gpa .315 -.097
fellow .309 -.083
comm .181 .153
jobex -.015 .344
organze -.068 .343
extra -.068 .331
Extraction Method: Principal Component Analysis.
Rotation Method: Varimax with Kaiser Normalization.
Component Scores.
Too risky
1
Too Risky
Successful Applicants
Successful
applicants
0
F2Score
No Good
Sure
-1
-2 -1 0 1 2
F1Score
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Step 1: Choosing number of factors to
extract from data
Do Factor Analysis
In SPSS select Analyze>Data Reduction>Factor…
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Step 2: Performing Factor Analysis with #
of factors from Step 1
Do Factor Analysis
Number of Factors to extract should be from Step
1
Try “None” rotation for a start (else try Varimax or
others if it doesn’t work)
In Graphs: select loading plot and score plot
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