Predictive Analytics

Prof. U. Dinesh Kumar

Introduction to Analytics
DK_PA_W01_C01

Hi! Welcome to the first week of the course—Predictive Analytics. In this week, I’m going to
talk about business analytics and how different organizations use analytics to solve their
problems. Let me start with the famous quote by Edwards Deming, he said "In God we trust,
all others must bring data". He mentioned this quote in 1930's or 40's, long before the terms
such as data scientist or analytics was in use. Let us try to understand what may have
triggered Edwards Deming to come up with this particular quote. When we talk about
decision making, many organizations actually use different kind of approaches. And there is
one famous approach which is called "Hippo Algorithm" which stands for "Highest Paid
Person's Opinion". What happens is, when organizations face problem they form a
committee. And the committee members come with different opinions and typically in most
cases they may go with the opinion of the highest paid person or in this case it may be CEO
or CFO or some CXO. When organization take decision based on highest paid persons
opinion, they can go wrong. So that's what triggered that quote. Many times when you
actually take decisions based on opinion we may go wrong. So we have to support the
decision with data, so that's why probably he said in "God we trust, all others must bring
data". Let us try to understand what is Business Analytics. Business Analytics is nothing but
collection of tools, techniques, processes that can be used for exploration of the past data.
So, after exploration of the past data we can gain insights and those insights can be used for
value add or for decision making. It is an integration between science—science in the form
of statistical and mathematical techniques—technology in the form of ERP systems, which
are used for collecting the data and business contacts. So, in this slide I have the business
analytics, which is basically integration between business context, technology and analytics.
Now let me start with the specific example, suppose, let us say, a bank is interested in
finding whether a particular customer should be given a loan or not. So, to do that, they
have to assess the credit risk and to assess the credit risk they may need lot of data. So, for
that data they may have to use ERP system so that the data is collected over a period of
time. So once you have identified the business context and the technologies, such as ERP
systems, then you can actually use the data and bring the analytical tools, such as logistic
regression, to assess the credit risk of a particular customer. So that's why it is a
combination or integration of business context, technology and analytics. The reason why
analytics has become popular is because of data explosion. In this slide, I have given few
examples of the kind of data we are dealing with today. The first one is about 7 billion
shares exchange hand in US equity market every day. People may like to know how many of
these exchanges are actually resulting in profit. The second one is 350 million photos are
uploaded every day in the Facebook. Now, you can question how is this useful. Suppose, let
us say, we are looking at a tourism company, they may like to know from where these
 Predictive Analytics
Prof. U. Dinesh Kumar
Introduction to Analytics
DK_PA_W01_C01

photos are getting uploaded so they can get an idea which places are becoming very
popular so that they can market those places. The third one is the amount of credit card
debt in US which is about $890.91 billion. The total amount of credit card fraud worldwide is
about $5.5 billion, which is earlier data. The number of bankruptcies in US in 2014 is
910,000. The question here could be whether we can actually predict the bankruptcies
before it occurs. The percentage of US credit card holders who have been victims of credit
card fraud was about 10 percent. Again whether we can predict fraud before it occurs and
every week about 260 million customers visit Walmart stores. So, we are looking at a huge
explosion of data and what also has happened is that the data collection has become easier.
So, we can actually use the data, gain insight and add value to the organization. That's the
reason why people now-a-days use analytics or business analytics.