The risk of misclassifying subjects within principal component based asset index

The asset index is often used as a measure of socioeconomic status in empirical research as an explanatory variable or to control confounding. Principal component analysis (PCA) is frequently used to create the asset index. We conducted a simulation study to explore how accurately the principal component based asset index reflects the study subjects' actual poverty level, when the actual poverty level is generated by a simple factor analytic model. In the simulation study using the PC-based asset index, only 1% to 4% of subjects preserved their real position in a quintile scale of assets; between 44% to 82% of subjects were misclassified into the wrong asset quintile. If the PC-based asset index explained less than 30% of the total variance in the component variables, then we consistently observed more than 50% misclassification across quintiles of the index. The frequency of misclassification suggests that the PC-based asset index may not provide a valid measure of poverty level and should be used cautiously as a measure of socioeconomic status.