Question

What is factor analysis? in which situation is it useful?

Answer 1

Solution:

Factor analysis is a statistical method used to describe variability among observed, correlated variables in terms of a potentially lower number of unobserved variables called factors.

The key concept of factor analysis is that multiple observed variables have similar patterns of responses because they are all associated with a latent (i.e. not directly measured) variable.

Factor analysis is a technique that is used to reduce a large number of variables into fewer numbers of factors. This technique extracts maximum common variance from all variables and puts them into a common score. As an index of all variables, we can use this score for further analysis.

For example the relationship of each variable to the underlying factor is expressed by the so-called factor loading. Here is an example of the output of a simple factor analysis looking at indicators of wealth, with just six variables and two resulting factors.