## Friday, 2 September 2011

### Discriminant Analysis: Uses and Applications

Discriminant analysis a very versatile tool used for second level analysis. The main purpose of a discriminant function analysis is to predict group membership based on a linear combination of the interval variables. The procedure begins with a set of observations where both group membership and the values of the interval variables are known. The end result of the procedure is a model that allows prediction of group membership when only the interval variables are known. A second purpose of discriminant function analysis is an understanding of the data set, as a careful examination of the prediction model that results from the procedure can give insight into the relationship between group membership and the variables used to predict group membership. Example -predict whether patients recovered from a coma or not based on combinations of demographic and treatment variables. The predictor variables might include age, sex, general health, time between incident and arrival at hospital, various interventions, etc.

Discriminant analysis is most often used to help a researcher predict the group or category to which a subject belongs. For example, when individuals are interviewed for a job, managers will not know for sure how job candidates will perform on the job if hired. Suppose, however, that a human resource manager has a list of current employees who have been classified into two groups: "high performers" and "low performers." These individuals have been working for the company for some time, have been evaluated by their supervisors, and are known to fall into one of these two mutually exclusive categories. The manager also has information on the employees' backgrounds: educational attainment, prior work experience, participation in training programs, work attitude measures, personality characteristics, and so forth. This information was known at the time these employees were hired. The manager wants to be able to predict, with some confidence, which future job candidates are high performers and which are not. A researcher or consultant can use discriminant analysis, along with existing data, to help in this task.

For discriminant analysis, the predictor variable needs to be ordinal or scale. This way we can accurately analyze the effect of such variables on our hypothesis.Some of the famous applications of of this method are- Bankruptcy prediction, where a very famous methods – the Altman Z score model is still used. The Z score is used to predict whether the firm will survive or not.

Face recognition also uses discriminant analysis. Linear discriminant analysis is primarily used here to reduce the number of features to a more manageable number before classification. Each of the new dimensions is a linear combination of pixel values, which form a template. The linear combinations obtained using Fisher's linear discriminant are called Fisher faces, while those obtained using the related principal component analysis are called eigenfaces.

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Finance - Group 1