Predictive Analytics: Definition,

Model Types, and Uses

What Is Predictive Analytics?
• Predictive analytics is the use of statistics and modeling techniques to
forecast future outcomes.
• Current and historical data patterns are examined and plotted to
determine the likelihood that those patterns will repeat.
• Businesses use predictive analytics to fine-tune their operations and
decide whether new products are worth the investment.
• Investors use predictive analytics to decide where to put their money.
• Internet retailers use predictive analytics to fine-tune purchase
recommendations to their users and increase sales.
KEY TAKEAWAYS
• Industries from insurance to marketing use predictive techniques to
make important decisions.
• Predictive models help make weather forecasts, develop video games,
translate voice-to-text messages, make customer service decisions, and
develop investment portfolios.
• Predictive analytics determines a likely outcome based on an
examination of current and historical data.
• Decision trees, regression, and neural networks all are types of
predictive models.
• People often confuse predictive analytics with machine learning even
though the two are different disciplines.
Understanding Predictive Analytics
• Predictive analytics looks for past patterns to measure the likelihood
that those patterns will reoccur.
• It draws on a series of techniques to make these determinations,
including artificial intelligence (AI), 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 using large blocks of text.
Predictive models and Predictive analytics
• Predictive models are used for many applications, including weather
forecasts, creating video games, translating voice to text, customer service,
and investment portfolio strategies.
• All of these applications use descriptive statistical models of existing data
to make predictions about future data.
• Predictive analytics helps businesses manage inventory, develop marketing
strategies, and forecast sales.
• It also helps businesses survive, especially in highly
competitive industries such as health care and retail.
• Global Newswire. "Trends in Predictive Analytics Market Size & Share will
Reach $10.95 Billion by 2022."
• Investors and financial professionals draw on this technology to help craft
investment portfolios and reduce their overall risk potential.
Predictive models and Predictive analytics
• These models determine relationships, patterns, and structures in
data that are used to draw conclusions as to how changes in the
underlying processes that generate the data will change the results.
• Predictive models build on these descriptive models and look at past
data to determine the likelihood of certain future outcomes, given
current conditions or a set of expected future conditions.
Uses of Predictive Analytics
• Predictive analytics is a decision-making tool in many industries.
Following are some examples.
• Manufacturing
• Credit
• Underwriting
• Marketing
• Stock Traders
• Fraud Detection
• Supply Chain
• Human Resources
Manufacturing
• Forecasting is essential in manufacturing to optimize the use 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.
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 repay any new credit that is approved.
Underwriting
• Data and predictive analytics play an important role in underwriting.
• Insurance companies examine applications for new policies to
determine the likelihood of having to pay out for a future claim.
• The analysis is 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.
Marketing
• Marketing professionals planning a new campaign look at how
consumers have reacted to the overall economy.
• They can use these shifts in demographics to determine if the current
mix of products will entice consumers to make a purchase.
Stock Traders
• Active traders look at a variety of historical metrics when deciding
whether to buy a particular stock or other asset.
• Moving averages, bands, and breakpoints all are based on historical
data and are used to forecast future price movements.
Fraud Detection
• Financial services use predictive analytics to examine transactions for
irregular trends and patterns.
• The irregularities pinpointed can then be examined as potential signs
of fraudulent activity.
• This may be done by analyzing activity between bank accounts or
analyzing when certain transactions occur.
Supply Chain
• Supply chain analytics is used to manage inventory levels and set
pricing strategies.
• Supply chain predictive analytics use historical data and statistical
models to forecast future supply chain performance, demand, and
potential disruptions.
• This helps businesses proactively identify and address risks, optimize
resources and processes, and improve decision-making.
• Companies can forecast what materials should be on hand at any
given moment and whether there will be any shortages.
Human Resources
• Human resources uses predictive analytics to improve various
processes such as identifying future workforce skill requirements or
identifying factors that contribute to high staff turnover.
• Predictive analytics can also analyze an employee's performance,
skills, and preferences to predict their career progression and help
with career development.
Predictive Analytics vs. Machine Learning
• A common misconception is that predictive analytics and machine
learning are the same.
• Predictive analytics help us understand possible future occurrences
by analyzing the past. At its core, predictive analytics includes a series
of statistical techniques (including machine learning, predictive
modeling, and data mining) and uses statistics (both historical and
current) to estimate, or predict, future outcomes.
• Thus, machine learning is a tool used in predictive analysis.
• Machine learning is a subfield of computer science that means "the
programming of a digital computer to behave in a way which, if done
by human beings or animals, would be described as involving the
process of learning." That's a 1959 definition by Arthur Samuel, a
pioneer in computer gaming and artificial intelligence.
Predictive Analytics vs Data Mining-> Most
Important to understand
Predictive Analytics Data Mining
Predictive analytics refers to the use of both new data mining refers to the computational technique
and historical data, statistical algorithms, and of discovering patterns in huge data sets involving
machine learning techniques to forecast future methods at the intersection of AI.
activity, patterns, and trends

It helps to make predictions based on future It helps to understand the gathered information
events. better.
Business analysts and other SMEs perform it. Statisticians and engineers perform it.

It applies business knowledge to find patterns to It applies algorithms such as classification and
get valid business predictions. regression on gathered information to find hidden
patterns.
Any questions???