In commerce, data analytics has become synonymous with efficient decision-making. As contemporary data scientists encounter gargantuan interrelated data sets replete with dependent variables and correlations, the need to make sense of these overwhelming volumes of information arises. Professionals turn to data simplification techniques such as factor analysis and principal component analysis to tackle this challenge. By reducing the number of variables and uncovering underlying factors, these methodologies enable a more comprehensive understanding of complex data structures. This article will explore each of the techniques in depth, discuss PCA vs factor analysis, and explain the necessary concepts through examples.
Shedding light on factor analysis
Factor analysis, broadly categorized into exploratory and confirmatory types, endeavors to identify the covariance of observed variables by inferring one or multiple factors. Exploratory factor analysis delves into the latent variables or factors comprising different covariances and aims to predict the observed variables and their relationships with these factors. On the other hand, confirmatory factor analysis serves as a confirmatory test to determine the number of factors required for a set of interrelated variables, shedding light on the factor loadings of each variable for enhanced comprehension.
Now, let us elucidate the concept of latent variables. These variables represent a collection of covariances between observed variables, consolidating minute changes into a broader aspect to facilitate better understanding. To illustrate this, consider a consumer satisfaction questionnaire evaluating various aspects of a product, such as value proposition, utility, desirability, design, ergonomics, build quality and endurance. By analyzing the covariances among these variables, additional variables can be inferred, referred to as latent variables.
In the given example, latent variables like design, ergonomics, build quality, and endurance contribute to determining the product’s longevity, while utility, desirability, value proposition, and desirability define its commercial relevance. These two factors—longevity and commercial relevance—emerge as the latent variables or factors in this scenario.
Essential data traits for factor analysis
- The data must be devoid of outliers and exceptions to maintain accuracy.
- The number of factors should be less than the sample size, ideally maintaining a ratio of at least 5:1 between the two.
- The variables must be inferred by a factor, should display interrelationships, and should be amenable to a matrix or numeric measurements.
- Performing data normalization is crucial, multivariate normalization is deemed unnecessary in this context.
A discussion on principal component analysis
Moving on, let us explore principal component analysis (PCA), a technique employed to simplify data sets by reducing the dimensionality of variables and covariances. To better comprehend this approach, let us consider a collection of cars with various attributes, classified into sedans, SUVs, and crossovers. Instead of plotting numerous individual aspects for each section, which would be impractical in our fast-paced post-pandemic world, PCA enables comparison based on a few key factors. These factors, known as principal components, encapsulate the myriad minor components, thus concisely representing the underlying variables.
PCA vs. Factor analysis
- PCA aims to account for the maximum variance in the data, while factor analysis focuses solely on the common variances.
- PCA operates on the complete correlation matrix, providing a comprehensive understanding of the adjusted correlation matrix. It mitigates substantial variance-related measurement errors and avoids multicollinearity issues in regression, particularly concerning factor loadings. In contrast, factor analysis yields redundant factor classification, whereas PCA classifies factors based on the explained variability.
- Furthermore, the number of components in PCA is computed rather than predetermined, whereas factor analysis requires a predetermined number of factors.
The utilization of factor analysis and principal component analysis empowers data scientists to navigate the complex landscape of massive and interrelated data sets. And thus, budding data professionals must understand the relevance of a discussion on PCA Vs factor analysis. And dive deep into their utility for a satisfactory grip on the techniques. These techniques allow the overwhelming volumes of information to be distilled into meaningful factors and components, enabling more efficient decision-making and insightful analysis.