PITFALLS IN THE APPLICATION OF DISCRIMINANT ANALYSIS IN BUSINESS, FINANCE, AND ECONOMICS

SEVERAL COMMON PROBLEM AREAS APPEARING IN THE APPLIED DISCRIMINANT ANALYSIS LITERATURE ARE DISCUSSED. PROBLEMS RELATED TO CLASSIFICATION ARE THE MOST SEVERE, WITH THE ISSUES SURROUNDING THE SELECTION OF THE APPROPRIATE A PRIORI PROBABILITIES BEING THE MOST IMPORTANT FOLLOWED, IN TURN, BY THE SELECTION OF THE APPROPRIATE CLASSIFICATION RULES AND ASSESSMENT OF CLASSIFICATION ACCURACY. OTHER PROBLEMS INCLUDE NONNORMALITY, THE SELECTION OF SUBSET VARIABLES AND REDUCING DIMENSIONS, INTERPRETING THE SIGNIFICANCE OF INDIVIDUAL VARIABLES, THE GROUP DISPERSIONS, THE ESTIMATION OF CLASSIFICATION ERROR RATES, AND THE REDUCTION OF DIMENSIONALITY. GRAPH. TABLES. REFERENCES.