Predictive analytics
Predictive analytics is the process of using data to forecast future outcomes. The
process uses data analysis, machine learning, artificial intelligence, and statistical
models to find patterns that might predict future behavior. Organizations can use historic
and current data to forecast trends and behaviors seconds, days, or years into the
future with a great deal of precision.
How does predictive analytics work?
Data scientists use predictive models to identify correlations
between different elements in selected datasets. Once data
collection is complete, a statistical model is formulated,
trained, and modified to generate predictions.
The workflow for building predictive analytics frameworks follows five
basic steps:
1. Define the problem: A prediction starts with a good thesis and
set of requirements. For instance, can a predictive analytics model
detect fraud? Determine optimal inventory levels for the holiday
shopping season? Identify potential flood levels from severe weather?
A distinct problem to solve will help determine what method of
predictive analytics should be used.
2. Acquire and organize data: An organization may have decades
of data to draw upon, or a continual flood of data from customer
interactions. Before predictive analytics models can be developed,
data flows must be identified, and then datasets can be organized in a
repository such as a data warehouse like BigQuery.
3. Pre-process data: Raw data is only nominally useful by itself.
To prepare the data for the predictive analytics models, it should be
cleaned to remove anomalies, missing data points, or extreme
outliers, any of which might be the result of input or measurement
errors.
4. Develop predictive models: Data scientists have a variety of
tools and techniques to develop predictive models depending on the
problem to be solved and nature of the dataset. Machine learning,
regression models, and decision trees are some of the most common
types of predictive models.
5. Validate and deploy results: Check on the accuracy of the
model and adjust accordingly. Once acceptable results have been
achieved, make them available to stakeholders via an app, website, or
data dashboard.
Objective of predictive analytics
The goal of predictive analytics is to make predictions about future
events, then use those predictions to improve decision-making.
Predictive analytics is used in a variety of industries including finance,
healthcare, marketing, and retail
Functions of predictive analytics
Predictive analytics is a form of advanced analytics that uses current
and historical data to forecast activity, behavior and trends. It involves
applying statistical analysis techniques, data queries and machine
learning algorithms to data sets to create predictive models that place
a numerical value -- or score -- on the likelihood of a particular action
or event happening.
Predictive analytics is a key discipline in the field of data analytics,
How to develop a predictive analytics process
A detailed description of the key steps in deploying predictive analytics
and the people skills required for them can be found in Lawton's
article, "5-step predictive analytics process cycle." Here is a summary
of each step:
1. 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.
2. 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.
3. 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.
4. 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.
5. 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.
Applications of Predictive
Analytics Models
Predictive analytics models have numerous applications in various
industries, including:
Finance: In finance, predictive analytics models are used to
forecast stock prices, credit risk, and other financial metrics. These
models are used by banks and financial institutions to identify
potential risks and opportunities.
Healthcare: uses predictive analytics models to forecast disease
outcomes, identify high-risk patients, and improve patient
outcomes. Hospitals and healthcare providers use these models to
improve patient care while lowering costs.
Marketing: Marketing uses predictive analytics models to identify
customer segments, predict customer behaviour, and optimise
marketing campaigns. Businesses use these models to improve
customer engagement and sales.
Manufacturing: Predictive analytics models are used in
manufacturing to predict equipment failures, optimise production
processes, and reduce downtime. Manufacturers use these models
to increase efficiency and lower costs.
Retail: Retailers use predictive analytics models to forecast
customer demand, optimise inventory levels, and improve pricing
strategies. These models are used by retailers to improve customer
satisfaction and increase sales.
predictive analytics
models?
Predictive analytics models are classified into several types, including:
1. Regression models: These models use one or more input
variables to predict a continuous numeric value, such as sales
revenue or customer lifetime value.
2. Classification models: these are used to categorize data into one
of two or more groups based on input variables. Fraud detection,
customer segmentation, and spam filtering are a few examples.
3. Time series models: These models are used to predict future
values based on historical trends and patterns in time-series data,
such as stock prices, weather patterns, or website traffic.
4. Clustering models: These models are used to categorize data
points based on similarities in their characteristics or behaviors.
Clustering models are often used for customer segmentation and
market basket analysis.
5. Neural network models: These models are used to identify
complex patterns in data and are based on the structure and
function of the human brain. Image and speech recognition, natural
language processing, and predictive maintenance are all common
applications for neural network models.
6. Decision trees: These models are used to generate a visual
representation of possible outcomes based on various decision
paths. They are frequently used to assess risk, detect fraud, and
analyze customer churn.
7. Ensemble models: combine multiple predictive models to improve
accuracy while reducing the risk of overfitting. Random forests,
gradient boosting, and stacking models are some examples.
These are a few predictive analytics models examples. There are
numerous other models, each with its own set of strengths and
weaknesses, that can be used to solve various types of problems.
What are applications of Regression Analysis?
Most of the regression analysis is done to carry out processes in finances. So,
here are 5 applications of Regression Analysis in the field of finance and
others relating to it.
1. Forecasting:
The most common use of regression analysis in business is for
forecasting future opportunities and threats. Demand analysis, for
example, forecasts the amount of things a customer is likely to buy.
When it comes to business, though, demand is not the only dependent
variable. Regressive analysis can anticipate significantly more than just
direct income.
For example, we may predict the highest bid for an advertising by
forecasting the number of consumers who would pass in front of a
specific billboard.
Insurance firms depend extensively on regression analysis to forecast
policyholder creditworthiness and the amount of claims that might be
filed in a particular time period.
2. CAPM:
The Capital Asset Pricing Model (CAPM), which establishes the link
between an asset's projected return and the related market risk premium,
relies on the linear regression model.
It is also frequently used in financial analysis by financial analysts to
anticipate corporate returns and operational performance.
The beta coefficient of a stock is calculated using regression analysis.
Beta is a measure of return volatility in relation to total market risk.
Because it reflects the slope of the CAPM regression, we can rapidly
calculate it in Excel using the SLOPE tool.
3. Comparing with competition:
It may be used to compare a company's financial performance to that of
a certain counterpart.
It may also be used to determine the relationship between two firms'
stock prices (this can be extended to find correlation between 2
competing companies, 2 companies operating in an unrelated industry
etc).
It can assist the firm in determining which aspects are influencing their
sales in contrast to the comparative firm. These techniques can assist
small enterprises in achieving rapid success in a short amount of time.
4. Identifying problems:
Regression is useful not just for providing factual evidence for
management choices, but also for detecting judgement mistakes.
A retail store manager, for example, may assume that extending
shopping hours will significantly boost sales.
However, RA might suggest that the increase in income isn't enough to
cover the increase in operational cost as a result of longer working
hours (such as additional employee labour charges).
As a result, this research may give quantitative backing for choices and
help managers avoid making mistakes based on their intuitions.
5. Reliable source
Many businesses and their top executives are now adopting regression
analysis (and other types of statistical analysis) to make better business
decisions and reduce guesswork and gut instinct.
Regression enables firms to take a scientific approach to management.
Both small and large enterprises are frequently bombarded with an
excessive amount of data.
Managers may use regression analysis to filter through data and choose
the relevant factors to make the best decisions possible.
Conclusion
For a long time, regression analysis has been utilised extensively by
enterprises to transform data into useful information, and it continues to be a
valuable asset to many leading sectors.
The significance of regression analysis lies in the fact that it is all about data:
data refers to the statistics and statistics that identify your company.
The benefits of regression analysis are that it allows you to essentially crunch
the data to assist you make better business decisions now and in the future.
Forecasting Methods
The two main categories of forecasting take very different approaches. Causal
forecasting attempts to predict a variable by trying to explain what factors cause it to
change. For example, a causal model to predict market demand for a product might
use the product's price, competitors' prices and the amount of money spent on
advertising to explain what product demand might be six months in the future.
Causal forecasting can be insightful, and is useful to illustrate "what if" scenarios,
but the models are more difficult to devise and implement than time-series models.
Methods: Time-Series
Time-series analysis uses the historical performance of the variable to make
predictions about its future, according to Statistics Solutions . There are many ways
to decide how to use the historical data, but no other variables will be present in a
time series model. The time-series approach can't yield information about how a
variable will behave in different conditions, but it can produce a powerful estimate
of the variable relatively efficiently.
Linear Regression Approach
Linear forecasting models can be used in both types of forecasting methods. In the
case of causal methods, the causal model may consist of a linear regression with
several explanatory variables. This method is useful when there is no time
component.
For example, a company might want to forecast when a material will melt under
different conditions of temperature and pressure. For time-series analysis, it is
possible to develop a linear regression model that simply fits a line to the variable's
historical performance and extrapolates that into the future. This is unable to account
for seasonality or other cycles, as well as nonlinearity, but if the variable in question
is plausibly linear, using linear regression to forecast it might yield a useful
prediction.
Using Linear Regression
Because much economic data has cycles, multiple trends and non-linearity, simple
linear regression is often inappropriate for time-series work, according to Yale
University. On the other hand, linear trend forecasting methods and related statistical
approaches are useful for causal models due to their ability to take into account
several different factors and evaluate the impact of each one. The proper use of
linear regression depends on the data and the goals of the forecaster.
