Structural Equation Modeling: Everything You Need to Know

Structural Equation Modeling (SEM) is the cumulation of related methods and not a single technique. The methods are flexible, and the framework is for data analysis.

Researchers prefer these methods because it enables them to estimate multiple and interrelated dependencies in a single analysis. Structural equation modeling uses two types of variables, endogenous and exogenous.  

It is very well known that “with power comes responsibility,” so the powerful structural equation modeling must be used judiciously. Structural equation modeling is complex, but at the same time, it is very easy for us to encounter awkward situations with the rapidly user-friendly software.

What is the Major Need to use Structural Equation Modelling? 

In any organization, marketing is very important. And to be successful in marketing, one must know about the consumers. They must know their attitude, opinions, and personality traits. But these characteristics are latent and cannot be measured easily because they are often abstract.

As of now, to measure them, we can conduct surveys, create an observation model, and so forth. But these processes are not that much fruitful because measuring and observing has the drawback of errors. Structural equation modeling excels at both tasks.

Structural equation modeling uses factor analysis and multiple regression analysis. If we use both these analytic methods individually, we miss out on the flexibility. So, SEM provides us with flexibility. It is suited for causal analysis, multicollinearity, which is correlating independent variables.

Read: Types of Attribution Modeling

The measurement model is the analogous factor analysis in structural equation modeling. The structure model is the knot that ties the components and elements of the measurement model. Structure models relate the components and elements together or to other independent variables. In some cases, variables are combined on empirical grounds.

The combining act happens prior to factor analysis, and the measurement model has no role. In other cases, when we are only concerned with raw variables, the observed variables are used. And lastly when there is no measurement model, then the structure model follows the path analysis.

Structural equation modeling is used to analyze survey data. It is not bound to one data source and can be used with customer transaction, economic, social media, customer transaction data. Recently it is used in neuroscience for fMRI data. In its modern forms, it can be used with any datatype – the model uses data types such as ratio, interval, ordinal, nominal, and count. They help to model curvilinear relationships among variables.

Structural equation modeling can work without complete data, but that should not tempt us not to feed every data to the model. The model is widely used for longitudinal, mixed, and hierarchical modeling. It may be used in Segmentation. The model accommodates multiple dependent variables such as the Conjoint Analysis. Structural equation modeling is used to fix response style issues in consumer surveys.

When to Use Structural Equation Modelling

There may be a business case that needs you to focus on consumer perceptions such as purchase interest, liking, in your product. Though this is a complex modeling task, structural equation modeling is apt for these objectives. Structural equation modeling is used for simpler jobs, such as for a consumer survey. 

Structural Equation Mixture Modeling (SEMM) is another type of method to target the hidden segments of consumers with very numerous amounts of data. 

One must not assume that one type of model is suitable for any kind of analysis. Mixture modeling sometimes works only when the effort is made competently. Sometimes one overall model works simply fine.

Is Structural Equation Modeling Good, Bad, or Ugly?

When you are working in an environment in which nonexperimental designs were common such as industrial or organizational psychology, structural equation modeling is required. Structural equation modeling is widely used and is being used by reviewers for data analysis. The reviewers are often clueless about how to proceed further. 

The major advantage of Structural equation modeling is that it allows for tests of theoretical propositions. Structural equation modeling enables you to evaluate quantitative predictions.

Similarities Between Traditional Statistical Methods and SEM

  • Structural equation modeling follows the same traditional methods such as regression, correlation, and variance in multiple ways. 
  • Both Structural equation modeling and traditional methods have the same concept as linear statistical models. 
  • With certain assumptions, statistical tests are valid. Structural equation modeling assumes multivariate normality and traditional methods assume a normal distribution. 
  • Neither traditional nor structural equation modeling offers a test of causality.

Differences Between Traditional and SEM Methods

Traditional methods vary from structural equation modeling in the following areas:

  • Structural equation modeling is comprehensive and flexible. Structural equation modeling is suitable for self-efficacy, depression, health trends, economic trends, family dynamics, and other phenomena.
  • Structural equation modeling needs formal specification for estimation and testing, while the traditional method follows default methods. Structural equation modeling does not offer a default model and has few limitations on specifying the types of relations. Structural equation modeling needs researchers to support hypotheses with theory.
  • Structural equation modeling is a multivariate technique, which incorporates both observed and unobserved variables while traditional methods analyze only variables that are measured. Structural equation modeling solves multiple related equations simultaneously. This determines parameter estimates with structural equation modeling.
  • Structural equation modeling allows analysts to find the imperfections in their measures. Structural equation modeling finds an error while traditional methods assume there are no measurement errors.
  • Structural equation modeling has no straightforward tests to determine which model is the best but traditional method analysis and provides straightforward tests to find relationships between variables.
  • Structural equation modeling uses its model to examine multiple tests such as Bentler-Bonett Non-Normed Fit Index (NNFI), chi-square, Comparative Fit Index (CFI), Root Mean Squared Error of Approximation (RMSEA)).
  • Structural equation modeling solves multicollinearity issues. Structural equation modeling uses multiple measures to describe an unobserved variable. Multicollinearity does not occur because unobserved variables are distinct latent constructs.
  • Structural equation modeling uses graphical language to present complex relationships in a powerful way. The structural equation modeling specification is based on a set of variables. Graphical or pictorial representation of a model transforms into a set of equations. The set of equations helps to solve multiple tests and estimate parameters.

Also Read: Regression Models in Machine Learning

The Use of Structural Equation Modeling is Impacted By

  • The hypothesis being tested and researched.
  • The sample size of requirement: On average, the ratio must be 20:1 for the number of subjects to the number of model parameters. But mostly 10:1 is more accurate. When the ratio is less than 5:1, the estimates are unstable.
  • Instruments of measurement.
  • Multivariate normality.
  • Identification of parameters.
  • Addressing outliers.
  • Missing data.
  • Interpretation of model fit indices.

Structural Equation Modelling Process

The Structural equation modeling analysis proceeds through the following methods:

  • research the relevant theory 
  • review literature to support model specification
  • specifies model such as diagram and equations
  • determines the number of degrees of freedom and the model identification to estimate the parameters to find unique values 
  • selecting the measurement methods for the variables represented in the model
  • collect data
  • perform preliminary descriptive statistical analysis such as missing data, scaling, and collinearity issues
  • estimate the model parameters
  • estimate model fit
  • specify the meaningful mode
  • interpret results
  • present results

Structural Equation Modelling Specific Software

  • LISREL was the fitting structural equation models software in the 1970s.
  • The OpenMx R package is an R open-source that provides an open-source and an updated version of the Mx application.

The goals of structural equation modeling are to understand the correlated patterns among a set of variables and explain the variances as much as possible.

Advanced Uses of Structural Equation Modelling

  • Measurement invariance
  • It is the technique that allows the joint estimation of multiple models, each with different sub-groups. Applications that include analysis of differences between groups such as cultures, gender, and so forth and behavior genetics.
  • Latent growth modeling
  • Hierarchical/multilevel models
  • Mixture model (latent class) Structural Equation Modelling
  • Alternative estimation and testing techniques.
  • Robust inference
  • Survey sampling analyses
  • Multi-method 
  • Multi-trait models
  • Structural Equation Model Trees

Final Thoughts

There are many models that may claim to provide similar modeling techniques when analyzing the data, but they follow very different courses of action for decision making. We need to ensure we do not choose a model that overfits, which is a mistake one does with Structural Equation Modelling. There is a human element when we select statistical modeling techniques, and that can be taken into consideration. 

A key area of Marketing Research lies between qualitative research and hard, quantitative research, and structural equation modeling is not suitable for dealing in this gray space. 

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  • What is the best sample size?

As per surveys and observations, we must have a minimum of 200 cases and at least 20 cases per variable. For example, we must have 500 respondents if there are 50 attribute ratings in the model. 

Structural equation modeling is slowly migrating to Education, Psychology, and Sociology. Data Scientists are getting acquainted with structural equation modeling. With today’s rapidly changing technology, the model now works well on quite large samples with many variables. Therefore “big” is relative! In a few cases, we can use a standard machine learning tool like LogitBoost for predictions. 

  • What statistical assumptions are required?

This depends upon the type of structural equation modeling. Structural equation modeling, like most statistical procedures, therefore they are robust to violations of assumptions and errors.

  • Does structural equation modeling test hypotheses?

This is a misconception about statistics. Data and its analysis do not happen out of thin air and are based on observations. As it is human nature, we observe things and they tend to guess how that’s happening; this is an exploratory analysis that has its own high risk.

  • Which model is the best?

There are several indices to measure this, such as the Comparative Fit Index (CFI) and the Root Mean Square Error of Approximation (RMSEA) are some of the most common. The most well-known is the R squared. You have to decide which is the best model based on commonsense and decision-making capabilities.

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