PREDICTIVE ANALYTICS-

MYTH OR REALITY
A dissertation submitted to
CRISIL

In consideration for participation in the competition

CRISIL YOUNG THOUGHT LEADERS - 2017

By RISHABH GUPTA
MBA 2017-2019 DIME,IIT KANPUR
On 29th October, 2017
Index
Content Page No

Executive summary 2

Introduction 2-3

Industrial Applications 4-5

Pitfalls in 6
implementation
Myths vs realities 7-8

Conclusion 8

References 9

Font used- Times New roman

Font size- 12
Spacing- 1.25
Language- English
Word count
1. Executive summary-194
2. Introduction, findings & Conclusion- 2255
3. References-25
EXECUTIVE SUMMARY:-

The world has shifted from living in the present to foreseeing the future. It’s an era where huge
amount of data is available, which is analysed, modelled and deployed to increase consumer
base, prevent fraud, invest money, and retain employees. Predictive analytics is the talk of the
era. Almost every industrial sector has developed algorithms to analyse the data available and
predicting what the future holds for them and what steps they can take to grow continually.
Financial sector has employed predictive analysis to model the available structured data and use
it to create models for various purposes which have been discussed. With every opportunity
comes a challenge. Industries employing predictive analysis faces pitfalls and myths. As I have
proceeded further in this document, I discovered how predictive analytics have helped various
industries to grow and solve some of their major setbacks. I have tried to trace out some common
myths about the method of predicting future outcomes which prevails. There on I have discussed
the realities of implementing this method to get the best out of it. At the end of the document I
have tried to put forward my views about it.

INTRODUCTION:-

As per the World quality report 2015-2016, published by Capegemini, Sogeti and Hewlett
Packard enterprise, which found that 66% of respondents in the automotive industry have
business /analytics specialists in their testing organizations, and 47% use predictive analytics to
construct test strategies. Across the health and life science industry, the report says, 67% employ
business /analytics specialists. This is just a drop in the ocean of opportunities provided by
predictive analytics in a world where people and companies are going to any extent of taking an
advantage over their competitors.

Predictive analytics is an advanced form of analytics approach deployed to forecast or make

predictions about unknown future events. Using the historical trends and transactional data ,it is
meant to identify risks and opportunities for future. These predictions are derived from existing
data, almost as if creating new information out of thin air. Examples include HP inferring an
employee’s intent to resign, retailer Target deducing a customer’s pregnancy, and law
enforcement in Oregon and Pennsylvania foretelling a convict’s future repeat offense. Various
methods such as data mining, statistics, modelling, machine learning and artificial intelligence
have been adopted to analyse current data.

Gartner segmented the usage of different stages of data with its value and the difficulty in
obtaining it at Y axis and X axis respectively.
 How can we
Make it happen?

What will Prescriptive

Happen? analytics
Predictive
Why did it
happen ? analytics

What Diagnostic
Happened? analytics
Value

Descriptive
analytics

Difficulty

The process of predictive analytics can be broken down into segments all of which are shown
below.

1. Project Definition: The project outcome is identified. Subsequently the deliverables,

business objectives are laid down which creates the pathway of gathering the data sets
which are to be used.
2. Data Collection: Data from various sources are brought together to be used for the
further part of the process.
3. Analysis: The data is inspected, cleansed, transformed and modelled to arrive at a
conclusion or in other words forecast the probable outcomes.
4. Statistics: Statistical methods are implemented to validate if the findings, assumptions
and hypothesis are approximated well.
 5. Modelling: The accurate predictive models to forecast can be provided among which the
best option can be chosen as the required solution with multi model evaluation.
6. Deployment: Through the predicative model deployment an option is created to deploy
the analytics results into everyday effective decision.
7. Monitoring: Models implemented are monitored to control and check for performance
conformance to ensure that the desired results are obtained as expected.

Industrial Application of predictive analytics.

Various industries are implementing data analytics to improve their processes, increasing the
revenue, fraud detection, decreasing crime, retaining employees.
Financial industry employs an ocean of data and that too structured data so it aims to make the
most out of it. Big data analytics will bring about significant changes in value generation for the
financial services industry. But at the same time a fact which cannot be overlooked is that too
much data and not enough insight or analytics to understand it can cause digital overload. By
employing predictive analysis financial service providers can design ways to offer their
customers more personalised experiences. A vast amount of data is generated by various
channels when they are browsed for services like loans, saving products etc. Predictive analytics
offers a opportunity for these interactions to become increasingly personalised for the customer ,
based on the combination of their past preferences ,real time needs, and pattern of spending and
investing money. Let’s see how it can be done.

1. Big data enabled AI.

Big data enables the use of AI in the financial services industry because it provides the necessary
capacity for learning algorithms to consume data as well as make strategic decisions. For
example big data can enable AI to provide recommendations to the business development arm
around the location of a branch. This will significantly reduce the workload of background
research team. Deutsche Bank’s robo advisor which uses algorithms to compile individualised
portfolios for investors is a live example.

2. Big data in fraud detection and prevention.

Financial institutions deploy big data analytics to compare data from various sources-including
location, shopping patterns and previous transactions to red flag the inconsistencies and take
action. Predictive analytics tools develop models to prevent fraud. Semantic Technology
analyse text using big knowledge graphs. This allows more comprehensive discovery of
suspicious patterns using data from various sources.

The Asset recovery intelligent system prototype is an asset tracking system which uses
semantic technology to identify fraud. ARIS identifies keywords, summarizes and infers new
facts to create a knowledge base of all people and parties involved, all networks and roles.

3. Introducing Vitria OI for streaming Analytics.

 Traditional business intelligence (BI) and data warehousing approaches rely on persisting data
and bulk analysis has not been able to deliver insights on time. Vitria operational Intelligence
system uses an event driven architecture to tackle streaming big data, delivering real time
analytics that can help detect customer affecting issues, even before that happen. By correlating
and analysing streams of data from various sources like web application, IP address, device,
customer, demographic, Vitria OI provides financial services firms with continuous, real time
operational intelligence that outs them in better position to improve their customers’ experience,
engage in real time one to one marketing to cross sell and up-sell the right offers at the right
time. It also helps to detect and prevent fraud.
Vitria OI can help financial firms in the following areas.

a. Real-time fraud detection and prevention

b. Real-time one-to-one marketing
c. Real-time customer experience management
d. Real-time trade reconciliation

Let us go through some instances where the models of predictive analysis has been applied:-
Using Big data technology and machine learning algorithms are constructed to take into account
the current state of the market and identify similar transactions which might be of interest to the
investors. In 2014, Goldman Sachs led a $15 million round for big data analytics start up
kensho. Kensho’s predictive analytics capabilities have enabled leading financial institutions to
drastically shorten processing time for analysing the impact of global market scenarios on
various asset classes. This helped firms to cut costs and reduce inefficiencies. In 2015 a firm
Blue Yonder secured the backing of global private equity firm Warburg Pincus to accelerate the
company’s ability to enable its clients to use predictive analysis. The platform provided insights
as well as statistical models for automated decisions. Hedge funds are the first one to employ
artificial intelligence in predictive applications. In the field of investments a designing software
Bridgewater associates has automated the day to day management of the firm including
investment activities. A firm Overbond, a digital primary bond issuance platform, uses
predictive analytics to make better informed decisions within primary bond issuance.
Transparency market research reported that the market for predictive analytics software will
reach $6.5 billion by 2019.
Pitfalls faced by organizations while making data driven decisions.

1. Large chunk of data

There is so much data available from various sources that the firm starts facing the challenge of
which data to use, how to use by integrating it together and aligning it in the right direction.
Most of the data obtained is unstructured for example, all the tweets about a product or brand
represent a potential treasure of insights. Yet this data is unstructured increasing the complexity
of capturing and analysing it.

2. Garbage in Garbage out

Data analytic software is only as good as the data feeding it. The quality of data is a major
concern. Unlike in financial industry most of the other industries have a deteriorated quality of
data which wastes a lot of resources. While many firms invest significant dollars in powerful
new data crunching applications, crunching data leads to flawed decisions. This is another major
concern faced by industries where the bad quality of data entered leads to a flawed outcome.

MYTHS VS REALITIES

So far we have discovered how predictive analytics is used by various organizations to analyse
current and historical facts to make predictions about health care, financial collection activities,
customer retention and many more. Although Predictive Analytics is a powerful optimization
technique, it is often misunderstood, and thus misused due to the misconceptions or myths
prevailing among the users .Below are some of the myths which the users generally believe in
and often land up with wrong solutions.

Myth 1: Predictive analytics produces “perfect” predictions and is always the best
technique.

Reality: The users of predictive analytics often overlook the fact that models are estimations
which sometimes does not take into consideration the intangible or abstract data . Let me
explain this with an example of a decision tree model being implemented for predicting
risk associated with extending credit to individuals. The decision tree classifies risk on
the basis of three variables which are supposedly tangible (income, renter status, and debt
status).

Income > $20000

Renter Yes No High Debt

No Yes Yes No

Bad risk Good Risk Bad risk Good risk

Now suppose a person ‘X’ who is a struggling artist, with low debt ends up with extra alimony
driving his total income above $ 20000. This way ‘X’ ends up in the category of good risk,
which in reality is not the case.
Moreover to apply predictive analytics in the present scenario the conditions needs to be optimal
so instead of straightaway formulating the predictive analysis model, the more simpler
techniques that are less resource intensive like profiling, correlation analysis, trend analysis can
be implemented.
Myth 2: Big data is a silver bullet.

Reality: Though pool of information and prospects can be a real competitive advantage but if
this overload of data is not processed and edited in a valuable manner, it can negatively affect the
analytics to conclude altogether a different solution. Businesses can reach better decisions
through better data management and analytics. Therefore even small amounts of data if correctly
processed can mean a huge leverage in zeroing down to more approximate prospects.

Myth 3: “Predictions are forever”

Reality: As we have discussed earlier in this paper, more data improves the predictions but as
time goes on, new data should be added into our model. Sometimes, the model might require to
undergo changes due to cultural shifts, demographic changes, and other events that might create
a need to radically change the model.

Myth 5: Data always speaks the truth so all business decisions should be based on what
data tells us.

Reality: Data does not lie. This is a 100 % correct statement but there may be multiple factors
that affect the quality of data driven insights like poor quality of the source data, environmental
assumptions, and erroneous approach in building predictive models, etc. So making solely data
driven decisions might prove to be wrong and deteoriating for the organization.
Business intuition along with data backed facts and figures proves to be handy and useful for
long term benefits. Therefore the real objective of predictive analysis is not to substitute business
intuition but to help evolve from “gut–feel based” decision making to “evidence based decision”
making.
One such example is the failure of Google Flu trends which was a web service started in 2008 to
predict flu outbreaks in about 25 countries. The logic was to detect some keywords in google
search queries like flu, cold, fever. But at the peak of 2013 flu season, the project GFT failed by
a whopping 140 % .This happened because the keywords used to analyse like cold, cough, fever
etc. were common to other searches also. This led to the demise of the project

Conclusion

Now a result which now seems more to be fact is that predictive analytics in combination of
machine learning enables businesses to anticipate emerging needs and adapt before their
competitors do, instead of scrambling to react after change becomes obvious . Unlike traditional
analytics and reporting tools that provides a perspective on what’s already happened or is now
happening, advanced analytics applies algorithms, and its tools offer a see through view to
predict future outcomes. As a testament to the power of predictive analytics in finance, total
investment in the industry has exponentially grown. But at the same time the challenges faced by
the organizations and myths prevailing in the market about predictive analysis needs to be
addressed carefully so as to make full use of the power of prediction. The sole objective of
introducing predictive analytics was to make smart decisions backed by an appropriate data. But
these misconceptions defeats this sole objective leading to opposite results. We discovered that
how just the data with no business knowledge does not guarantees success. How knowledge of
tangible or abstract values changes the results of the analysis. This technique to grow is not only
for big companies and can make a impact on SMB’s too. A telecommunication provider used
analytics to customize offers for millions of customers and reduced its customer defections to
others by 28%.An algorithm which was originally used to predict earthquakes, was implemented
to predict the probable hotspots for crime. The results were astonishing in Los Angeles where
burglaries reduced by 33% and 21% reduction was observed in violent crimes. Hence
predictive analytics is a technique which holds a capacity to foresee future outcomes and
accordingly firms design their processes to earn profits. But every user needs to face the
challenges of big volumes of data, sorting the quality data and analysing it using correct
statistical models to forecast most appropriate outcomes.

REFERENCES

1. https://techbeacon.com/predictive-analytics-disrupt-software-development
2. https://www.mckinsey.com/business-functions/digital-mckinsey/our-insights/making-
data-analytics-work https://www.computerworld.com.au/article/617969/unleashing-
value-big-data-financial-services-industry/
3. http://www.vitria.com/industries/financial-services/
4. https://ontotext.com/practical-big-data-analytics-financials/
5. Some common myths about predictive analytics-
http://birchmangroup.com/en/debunking-myths-about-predictive-analytics/
6. http://www.bi-bestpractices.com/view-articles/4713
7. http://www.xconomy.com/boston/2012/12/17/the-5-myths-of-big-data-analytics/
8. https://www.thebalance.com/challenges-managers-and-organizations-face-with-data-
4100645
9. https://www.thefinancialrevolutionist.com/opinion/predictive-analytics-in-financial-
services