Week 3

WEEK 3 BUSINESS DATA MINING
Data transformation techniques involve converting raw data into a more suitable format
for analysis, modeling, or visualization. These techniques help improve the quality of the
data, address issues such as skewness or non-linearity, and prepare the data for further
analysis. Here are some common data transformation techniques along with detailed
explanations:
1. Normalization:
- Normalization is the process of scaling numeric features to a standard range, typically
between 0 and 1 or -1 and 1. This ensures that all features have the same scale and
prevents features with larger values from dominating the analysis.
- The most common normalization techniques include Min-Max scaling and Z-score
scaling (standardization). Min-Max scaling scales the values to a range between 0 and 1,
while Z-score scaling standardizes the values to have a mean of 0 and a standard
deviation of 1.
- Normalization is particularly useful for algorithms that are sensitive to feature scales,
such as K-nearest neighbors (KNN) and support vector machines (SVM).
2. Log Transformation:
- Log transformation is used to reduce the skewness of data that is heavily right-skewed
or positively skewed. It involves taking the logarithm of the data values, which
compresses larger values more than smaller values.
- Log transformation is especially useful for data that follows an exponential
distribution or has a long tail. It helps stabilize the variance and make the data more
symmetrical, which can improve the performance of linear regression models and other
statistical techniques.
3. Box-Cox Transformation:
- The Box-Cox transformation is a family of power transformations that can be applied
to non-normal data to make it more normally distributed. It is defined as:
\[y(\lambda) = \begin{cases} \frac{y^\lambda - 1}{\lambda} & \text{if } \lambda \neq
0 \\ \log(y) & \text{if } \lambda = 0 \end{cases}\]
- The parameter \(\lambda\) is estimated from the data using maximum likelihood
estimation. The optimal value of \(\lambda\) is chosen to maximize the normality of the
transformed data.
- The Box-Cox transformation is useful for data that exhibits heteroscedasticity or non-
constant variance. It can improve the performance of parametric statistical tests and linear
regression models.
4. Binning:
- Binning (or discretization) is the process of dividing continuous numeric data into
discrete intervals or bins. This can help reduce the effects of small variations in the data
and simplify complex relationships between variables.
- Binning can be performed using various techniques, such as equal-width binning
(where bins have the same width) or equal-frequency binning (where bins contain the
same number of data points).
- Binning is useful for visualizing patterns in the data, identifying outliers, and reducing
the complexity of machine learning models.
5. Encoding Categorical Variables:

- Categorical variables need to be encoded into numerical values before they can be
used in many machine learning algorithms. Common encoding techniques include one-
hot encoding, label encoding, and target encoding.
- One-hot encoding converts categorical variables into binary vectors, where each
category is represented by a binary indicator variable. Label encoding assigns a unique
integer value to each category, while target encoding replaces each category with the
mean of the target variable for that category.
- Proper encoding of categorical variables is essential for preserving the information
contained in the data and preventing bias in the analysis or modeling process.
6. Feature Scaling:
- Feature scaling involves scaling numerical features to a similar range to prevent
certain features from dominating others during analysis or modeling. Common feature
scaling techniques include Min-Max scaling, Z-score scaling, and robust scaling.
- Feature scaling is particularly important for distance-based algorithms such as K-
means clustering and gradient descent-based algorithms such as logistic regression. It
helps improve the convergence of the algorithms and ensures that all features contribute
equally to the analysis or modeling process.
7. PCA (Principal Component Analysis):

- PCA is a dimensionality reduction technique that is used to reduce the number of
features in a dataset while preserving as much variance as possible. It works by
transforming the original features into a new set of orthogonal (uncorrelated) features
called principal components.
- PCA can help reduce the dimensionality of high-dimensional datasets, remove noise
and redundancy from the data, and improve the performance of machine learning models.
- PCA is particularly useful for exploratory data analysis, visualization, and feature
engineering.
These are some of the common data transformation techniques used in data preprocessing
and analysis. Each technique has its own advantages and limitations, and the choice of
technique depends on the characteristics of the data and the objectives of the analysis or
modeling task.

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WEEK 3 BUSINESS DATA MINING

5. Encoding Categorical Variables:

7. PCA (Principal Component Analysis):

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