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# Structural Equation Modeling

using Smartpls

Dr Tahir Iqbal
tahirse6393@gmail.com
03009469363
If the result confirms the
hypothesis,
measurement.
If the result is contrary to
the hypothesis,
discovery

## Enrico Fermi (1901 - 1954)

Nobel prize winner
Structural Equations Modeling
What comes to mind?

CB-SEM
LIS R EL AMO S ?

PLS-SE
M
Family Tree of SEM

Multiple samples,
Is the difference multiple variables, over
between T -te s t
A N O V A time, etc.
samples on a M u lti-w a y
variable A N O V A R e p e a te d
M ea su re
significant? D e s ig n s
G ro w th
C u rv e
A n a ly s is

L a te n t
G ro w th
Is the correlation M u ltip le P a th
S tru c tu ra l C u rv e
E q u a t io n A n a ly s is
between B iv a r ia te
C o r r e la tio n
R e g r e s s io n A n a ly s is
M o d e lin g

different
variables
significant? C o n fir m a to r y
F a c to r
A n a ly s is
F a c to r
A n a ly s is
Multiple variables,
overall model,
E x p lo r a to r y
F a c to r
measurement
A n a ly s is model, etc.
Multivariate Methods
Multivariate Measurement
Measurement = the process of assigning numbers to a variable/construct
based on a set of rules that are used to assign the numbers to the
variable in a way that accurately represents the variable.

## When variables are difficult to measure, one approach is to measure

them indirectly with proxy variables. If the concept is restaurant
satisfaction, for example, then the several proxy variables that could be
used to measure this might be:

## 1. The taste of the food was excellent.

2. The speed of service met my expectations.
4. The background music in the restaurant was pleasant.
5. The meal was a good value compared to the price.

## Multivariate measurement involves using several variables to

indirectly measure a concept, as in the restaurant satisfaction example
above. It also enables researchers to account for the error in data.
Structural Equation Modeling

## CB-SEM (Covariance-based SEM)

objective is to reproduce the theoretical
covariance matrix, without focusing on
explained variance

## PLS-SEM (Partial Least Squares SEM)

objective is to maximize the explained
variance of the endogenous latent
constructs (dependent variables)
CB-SEM evaluation focuses on goodness of
fit = minimization of the difference
between the observed covariance matrix
and the estimated covariance matrix.

## Research objective: testing and confirmation where

prior theory is strong.
Assumes normality of data distribution,
homoscedasticity, large sample size, etc.
Only reliable and valid variance is useful for
testing causal relationships.
A full information approach which means small
changes in model specification can result in
substantial changes in model fit.
PLS-SEM objective is to maximize the
explained variance of the endogenous
latent constructs (dependent variables).
Research objective: theory development and
prediction.
Normality of data distribution not assumed.
Can be used with fewer indicator variables (1 or 2)
per construct.
Models can include a larger number of indicator
variables (CB-SEM difficult with 50+ items).
Preferred alternative with formative constructs.
Assumes all measured variance (including error) is
useful for explanation/prediction of causal
relationships.
Structural Equation Modeling
Rules for Causal Diagrams
Exogenous vs. Endogenous Variables

## Direct and Indirect Effects

Residual Variables
Observed Latent Residual, uncorrelated
Structural Equation Modeling

Measurement Models
Structural Equation Modeling

Structural Models
Structural Equation Modeling

Simultaneous Models
CB-SEM Model

## HBAT, MDA database

Exogenous Latent Variable
/Construct
Verbal
Ability

## Indicator x1 x2 x4 x4 Endogenous Latent

s Variable
1 1 1 1 General
Intelligence

d1 d2 d3 d4 1

y1 y2 y3 y4 Indicator
1 1 1 1 s
Exogenous Latent Quantitative
Ability
Variable e1 e2 e3 e4

x5 x6 x7 x8 Indicator
1 1 1 1 s

d5 d6 d7 d8
PLS Path Model

Latent Construct
Rules of Thumb: PLS-SEM or CB-SEM?

## The goal is predicting key target constructs or identifying

key driver constructs.
Formative constructs are easy to use in the structural
model.
The structural model is complex (many constructs and
many indicators).
The sample size is small and/or the data is not-normally
distributed, or exhibits heteroskedasticity.
The plan is to use latent variable scores in subsequent
analyses.
Rules of Thumb: PLS-SEM or CB-SEM

## Use CB-SEM when:

The goal is theory testing, theory confirmation, or the
comparison of alternative theories.
Error terms require additional specification, such as the
co variation.
Structural model has non-recursive relationships.
Research requires a global goodness of fit criterion.
Data Characteristics PLS-SEM
Model Characteristics PLS-SEM
Algorithm Properties PLS-SEM
Model Evaluation Issues PLS-SEM
Reflective (Scale) Versus Formative (Index)
Operationalization of Constructs
A central research question in social science research, particularly
marketing and MIS, focuses on the operationalization of complex
constructs:

## Are indicators causing or being caused by

the latent variable/construct measured by them?
Indicator 1 Indicator 2 Indicator 3 Indicator 1 Indicator 2 Indicator 3

Construct
? Construct

## Changes in the latent variable Changes in one or more of the

directly cause changes in the indicators causes changes in
assigned indicators the latent variable
Basic Difference Between Reflective and Formative
Measurement Approaches

## Whereas reflective indicators are essentially interchangeable (and

therefore the removal of an item does not change the essential nature of
the underlying construct), with formative indicators omitting an indicator
is omitting a part of the construct.

## The formative measurement approach

generally minimizes the overlap between
complementary indicators
Construct
domain

Construct
domain

## The reflective measurement approach

focuses on maximizing the overlap
between interchangeable indicators
Reflective versus Formative

## Diet (Reflective) Health (Formative)

R1. I eat healthy food. F1. I have a balanced diet
R2. I do not each much F2. I exercise regularly
junk food. F3. I get sufficient sleep
R3. I have a balanced each night
diet. e3

Diet Health

R R R
F1 F2 F3
1 2 3

e1 e2 e3

EDM 643 26
Diet (Reflective) Health (Formative)
e3

Diet Health

R R R
F1 F2 F3
1 2 3

e1 e2 e3

## Direction of causality is from Direction of causality is from

construct to measure measure to construct
Measures expected to be No reason to expect the
correlated measures are correlated
Indicators are Indicators are not

interchangeable interchangeable
EDM 643 27
*From Jarvis et al 2003
Exercise: Satisfaction in Hotels as Formative and
Reflective Operationalized Construct

## The rooms furnishings The hotels recreation

The rooms are clean
are good offerings are good

## Taking everything into

account, I am satisfied I appreciate this hotel
with this hotel

## The hotels personnel Satisfaction

The hotel is low-priced
are friendly with Hotels

I am looking forward to
The rooms are quiet staying overnight in
this hotel

## I am comfortable with The hotels service is The hotels cuisine is

this hotel good good

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30 Latent Variables and Structural Equation Modeling
Systematic Process for applying PLS-SEM

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Systematic Process for applying PLS-SEM

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Systematic Process for applying PLS-SEM

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THUMB RULE REFLECTIVE CONSTRUCT ASSESSMENT

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THUMB RULE REFLECTIVE CONSTRUCT ASSESSMENT

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THUMB RULE FORMATIVE CONSTRUCT ASSESSMENT

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Causality

## Causality has theoretical

basis
Education Success
in Life

## Price Demand Supply

Unemp- Windows of
loyment No. of Opportunity
Rate Crimes for Crime
Statistical Modeling
A Statistical Model DOES NOT necessarily
have theoretical basis It may be
interpreted as either make sense
or nonsense
Weight
Heart
Disease

Income
Smoking

No. of No. of
Types of Significant Path

## Mediation Insignificant Path

Indirect Effect
X Y

Partial Mediation
X Y

Full Mediation
X Y
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More complex mediation
structures
Chain Model

X M1 M2 M3 Y

M1

X M2 Y

M3

Parallel Model
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Mediation Table

Mediation
Direct Beta Direct Beta
Hypothesis Indirect Beta type
w/o Med w/Med
observed
AB-C
Moderator vs. Mediator

A M B
K E
C

## Moderator: a variable that influences the

magnitude of the effect an IV has on a DV
M

K E

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