PREDICTIVE

ANALYTICS
Introduction

• Data analytics—the practice of examining data to answer questions,

identify trends, and extract insights—can provide you with the
information necessary to strategize and make impactful business
decisions.
• There are four key types of data analytics:
• Descriptive, which answers the question, “What happened?”
• Diagnostic, which answers the question, “Why did this happen?”
• Prescriptive, which answers the question, “What should we do next?”
• Predictive, which answers the question, “What might happen in the future?”
 Predictive Analytics
• Predictive analytics is the use of data to predict future trends and events.
It uses historical data to forecast potential scenarios that can help drive
strategic decisions.
• The predictions could be for the near future—for instance, predicting the
malfunction of a piece of machinery later that day—or the more distant
future, such as predicting your company’s cash flows for the upcoming
year.
• Predictive analysis can be conducted manually or using machine-learning
algorithms. Either way, historical data is used to make assumptions about
the future.
 What is Predictive Analytics?
• Predictive analytics is a branch of advanced analytics that makes
predictions about future outcomes using historical data
combined with statistical modeling, data mining techniques and
maching Learning.
• Companies employ predictive analytics to find patterns in this
data to identify risks and opportunities.
• Predictive analytics is often associated with big data and data
science.
 Predictive Analytics… Meaning
• Companies today are swimming in data that resides across
transactional databases, equipment log files, images, video,
sensors or other data sources.
• To gain insights from this data, data scientists use deep
learning and machine learning algorithms to find patterns and
make predictions about future events.
• These include linear and nonlinear regression, neural networks,
support vector machines and decision trees.
 Predictive Analytics… Meaning
• Predictive analytics is a form of technology that makes
predictions about certain unknowns in the future.
• It draws on a series of techniques to make these determinations,
including artificial intelligence, data mining, machine learning,
modeling, and statistics.
• For instance, data mining involves the analysis of large sets of
data to detect patterns from it.
• Text analysis does the same, except for large blocks of text.
 Predictive Models are used for all kinds of applications
• Weather forecasts
• Creating video games
• Translating voice to text for mobile phone messaging
• Customer service
• Investment portfolio development

All of these applications use descriptive statistical models of

existing data to make predictions about future data.
 Predictive Models are used for all kinds of applications
• Predictive Models are useful for businesses to help them
manage inventory, develop marketing strategies, and
forecast sales.
• It also helps businesses survive, especially those in highly
competitive industries, such as health care and retail.
• Investors and financial professionals can draw on this
technology to help craft investment portfolios and reduce the
potential for risk.
 Predictive Analytics…Examples
Finance: Forecasting Future Cash Flow
• Every business needs to keep periodic financial records, and predictive
analytics can play a big role in forecasting your organization’s future
health.
• Using historical data from previous financial statements, as well as data
from the broader industry, you can project sales, revenue, and expenses to
craft a picture of the future and make decisions.
 Predictive Analytics…Examples
Entertainment & Hospitality: Determining Staffing Needs

• In entertainment and hospitality, customer influx and outflux depend on

various factors, all of which play into how many staff members a venue or
hotel needs at a given time.

• Overstaffing costs money, and understaffing could result in a bad

customer experience, overworked employees, and costly mistakes
 Predictive Analytics…Examples
Marketing: Behavioral Targeting
• In marketing, consumer data is abundant and leveraged to create content,
advertisements, and strategies to better reach potential customers where
they are. By examining historical behavioral data and using it to predict
what will happen in the future, you engage in predictive analytics.
• Predictive analytics can be applied in marketing to forecast sales trends at
various times of the year and plan campaigns accordingly
 Predictive Analytics…Examples
Manufacturing: Preventing Malfunction
• While the examples above use predictive analytics to take action based
on likely scenarios, you can also use predictive analytics to prevent
unwanted or harmful situations from occurring.
• For instance, in the manufacturing field, algorithms can be trained using
historical data to accurately predict when a piece of machinery will likely
malfunction
 Predictive Analytics…Examples
Health Care: Early Detection of Allergic Reactions

• When a reaction is predicted to occur, an algorithmic response is

triggered. The algorithm can predict the reaction’s severity, alert the
individual and caregivers, and automatically inject epinephrine when
necessary.
• The technology’s ability to predict the reaction at a faster speed than
manual detection could save lives.
 Predictive Analytics Process
• Define the requirements.
• Understand the business problem you're trying to solve.
• Is it managing inventory?
• Reducing fraud?
• Predicting sales?
• Generating questions about the problem and listing them in order of
importance is a good start.
• Collaborating with a statistician at this stage can help form metrics for
measuring success.
• A business user or subject matter expert generally takes charge of this
first step.
 Predictive Analytics Process
Explore the data.
Here, you'll want to loop in a statistician or data analyst or both. The job is
to identify the data that informs the problem you're trying to solve and the
goal. Consider the relevancy, suitability, quality and cleanliness of the data.
Develop the model.
A data scientist can help figure out which predictive models are best suited
to solving the problem. It's important to experiment with different features,
algorithms and processes in order to strike a balance between
performance, accuracy and other requirements, such as explainability
 Predictive Analytics Process
Deploy the model.
Once the model is approved by the data scientist, a data engineer
determines how best to retrieve, clean and transform the required raw
data to deploy the model at scale and, above all, in a way that makes a
meaningful difference -- e.g., integrating a new scoring algorithm into the
sales team's workflow.
Validate the results.
Performance of the model can change over time due to shifts in customer
preferences or the business climate, or unforeseen events such as a
pandemic. Thresholds for updating models vary, requiring the joint
expertise of a business user and a data scientist in this step.
 Success of Predictive Analytics….
• Good predictions rely on good data. Incomplete or inaccurate data will
not result in good projections.
• Good future outcomes depend upon choosing the best predictive
modeling techniques when looking for patterns in data sets. Data
scientists are trained in this, and new automated machine learning
systems can run models to find the best approaches.
• Ambiguity is inevitable in predictions -- case in point: weather forecasts.
Learn to work with imperfect results.
• Your predictions should be actionable insights. You should be able to do
something useful with the prediction and test its accuracy in the future.
 Uses of Predictive Analytics
Forecasting
• Forecasting is essential in manufacturing because it ensures the
optimal utilization of resources in a supply chain.
• Critical spokes of the supply chain wheel, whether it is inventory
management or the shop floor, require accurate forecasts for
functioning.
• Predictive modeling is often used to clean and optimize the
quality of data used for such forecasts.
• Modeling ensures that more data can be ingested by the
system, including from customer-facing operations, to ensure a
more accurate forecast.
 Uses of Predictive Analytics
Credit
• Credit scoring makes extensive use of predictive analytics.
• When a consumer or business applies for credit, data on the
applicant's credit history and the credit record of borrowers with
similar characteristics are used to predict the risk that the
applicant might fail to perform on any credit extended.
 Uses of Predictive Analytics
Underwriting
• Data and predictive analytics play an important role in
underwriting.
• Insurance companies examine policy applicants to determine
the likelihood of having to pay out for a future claim based on
the current risk pool of similar policyholders, as well as past
events that have resulted in payouts.
• Predictive models that consider characteristics in comparison to
data about past policyholders and claims are routinely used
by actuaries.
 Uses of Predictive Analytics
Marketing
• Individuals who work in this field look at how consumers have
reacted to the overall economy when planning on a new
campaign.
• They can use these shifts in demographics to determine if the
current mix of products will entice consumers to make a
purchase.
• Active traders, meanwhile, look at a variety of metrics based on
past events when deciding whether to buy or sell a security.
• Moving averages, bands, and breakpoints are based on
historical data and are used to forecast future price movements.
 Types of Predictive Analytical Models

• The most common predictive models include

• decision trees,
• regressions (linear and logistic), and
• neural networks,

• which is the emerging field of deep learning methods and

technologies.
Types of Predictive Analytical Models
Decision Trees
• This type of model places data into different sections based on
certain variables, such as price or market capitalization.
• Just as the name implies, it looks like a tree with individual
branches and leaves.
• Branches indicate the choices available while individual leaves
represent a particular decision.
• Decision trees are the simplest models because they're easy to
understand and dissect.
• They're also very useful when you need to make a decision in a
short period of time
Types of Predictive Analytical Models
Regression
• This is the model that is used the most in statistical analysis.
• Use it when you want to determine patterns in large sets of data
and when there's a linear relationship between the inputs.
• This method works by figuring out a formula, which represents
the relationship between all the inputs found in the dataset.
• For example, you can use regression to figure out how price and
other key factors can shape the performance of a security.
Types of Predictive Analytical Models
Neural Networks
• Neural networks were developed as a form of predictive
analytics by imitating the way the human brain works.
• This model can deal with complex data relationships using
artificial intelligence and pattern recognition.
• Use it if you have several hurdles that you need to overcome like
when you have too much data on hand, when you don't have
the formula you need to help you find a relationship between
the inputs and outputs in your dataset, or when you need to
make predictions rather than come up with explanations.1
Types of Predictive Analytical Models .. other
• Bayesian analysis. .
• Ensemble models.
• Gradient boosting.
• Incremental response (also called net lift or uplift models).
• K-nearest neighbor (knn).
• Memory-based reasoning. .
• Partial least squares.
• Principal component analysis.
• Support vector machine. .
• Time series data mining.
 Tools
• A wide range of tools is used in predictive modeling and analytics.
• AWS,
• Google,
• IBM,
• Microsoft,
• SAP,
• SAS Institute and
• many other software vendors offer predictive analytics tools and
related technologies supporting
• machine learning and deep learning applications.
 Tools
• In addition, open source software plays a big role in the predictive
analytics market.
• The open source R analytics language is commonly used in predictive
analytics applications, as are the Python and Scala programming