Business Intelligence [Link](I.

T) SEM – VI UNIT - II

Subject: Business Intelligence

UNIT – II Syllabus
Mathematical models for decision making: Structure of mathematical models, Development of
a model, Classes of models

Data mining: Definition of data mining, Representation of input data , Data mining process,
Analysis methodologies

Data Preparation: Data validation, Data transformation, Data reduction

Prepared By: Prof. Ansari Mohd. Shahid (profshahid18@[Link]) Maharashtra College

 Business Intelligence [Link](I.T) SEM – VI UNIT - II

Mathematical Models for Decision Making

Note

• In the previous chapters we have emphasized the critical role played by mathematical
models in the development of business intelligence environments and decision support
systems aimed at providing active support for knowledge workers.

• In this chapter we will focus on the main characteristics shared by different mathematical
models embedded into business intelligence systems.

Structure of Mathematical Models

• Mathematical models have been developed and used in many application domains,
ranging from physics to architecture, from engineering to economics.
• The models adopted in the various contexts differ substantially in terms of their
mathematical structure.
• However, it is possible to identify a few fundamental features shared by most models.

▪ A model is a selective abstraction of a real system. In other words, a model is

designed to analyze and understand from an abstract point of view the operating
behavior of a real system, regarding which it only includes those elements deemed
relevant for the purpose of the investigation carried out.
▪ W.r.t Einstein on the development of a model: ‘Everything should be made as simple
as possible, but not simpler.’

▪ Scientific and technological development has turned to mathematical models

of various types for the abstract representation of real systems.

Prepared By: Prof. Ansari Mohd. Shahid (profshahid18@[Link]) Maharashtra College

 Business Intelligence [Link](I.T) SEM – VI UNIT - II

Models can be divided into the following.

Iconic.

• An iconic model is a material representation of a real system, whose behavior is imitated

for the purpose of the analysis. A miniaturized model of a new city neighborhood is an
example of iconic model.

Analogical.

• An analogical model is also a material representation, although it imitates the real

behavior by analogy rather than by replication. A wind tunnel built to investigate the
aerodynamic properties of a motor vehicle is an example of an analogical model intended
to represent the actual progression of a vehicle on the road.

Symbolic.

• A symbolic model, such as a mathematical model, is an abstract representation of a real

system. It is intended to describe the behavior of the system through a series of symbolic
variables, numerical parameters and mathematical relationships.

Stochastic.

• In a stochastic model some input information represents random events and is therefore
characterized by a probability distribution, which in turn can be assigned or unknown.

Deterministic.

• A model is called deterministic when all input data are supposed to be known a priori and
with certainty.
• Since this assumption is rarely fulfilled in real systems, one resorts to deterministic
models when the problem at hand is sufficiently complex and any stochastic elements are
of limited relevance.
• Notice, however, that even for deterministic models the hypothesis of knowing the data
with certainty may be relaxed.
• Sensitivity and scenario analyses, as well as what-if analysis, allow one to assess the
robustness of optimal decisions to variations in the input parameters.

Static.

• Static models consider a given system and the related decision-making process within
one single temporal stage.

Prepared By: Prof. Ansari Mohd. Shahid (profshahid18@[Link]) Maharashtra College

 Business Intelligence [Link](I.T) SEM – VI UNIT - II

Dynamic.

• Dynamic models consider a given system through several temporal stages, corresponding
to a sequence of decisions.
• In many instances the temporal dimension is subdivided into discrete intervals of a
previously fixed span: minutes, hours, days, weeks, months and years are examples of
discrete subdivisions of the time axis.
• Discrete-time dynamic models, which largely prevail in business intelligence
applications, observe the status of a system only at the beginning or at the end of discrete
intervals.
• Continuous-time dynamic models consider a continuous sequence of periods on the time
axis.

Development of a model

• It is possible to break down the development of a mathematical model for decision

making into four primary phases, shown in Figure below.
• The figure also includes a feedback mechanism which takes into account the possibility
of changes and revisions of the model.

Prepared By: Prof. Ansari Mohd. Shahid (profshahid18@[Link]) Maharashtra College

 Business Intelligence [Link](I.T) SEM – VI UNIT - II

Problem identification

• First of all, the problem at hand must be correctly identified. The observed critical
symptoms must be analyzed and interpreted in order to formulate hypotheses for
investigation.

A supposition or proposed explanation made on the basis of limited evidence as a

starting point for further investigation.

• For example, too high a stock level, corresponding to an excessive stock turnover rate,
may possibly represent a symptom for a company manufacturing consumable goods.
• It is therefore necessary to understand what caused the problem, based on the opinion of
the production managers.
• In this case, an ineffective production plan may be the cause of the stock accumulation.

Model formulation

• Once the problem to be analyzed has been properly identified, effort should be directed
toward defining an appropriate mathematical model to represent the system.
• A number of factors affect and influence the choice of model, such as the time horizon,
the decision variables, the evaluation criteria, the numerical parameters and the
mathematical relationships.

Time Horizon.

Usually a model includes a temporal dimension. For example, to formulate a tactical

production plan over the medium term it is necessary to specify the production rate for
each week in a year.

Evaluation criteria.

Appropriate measurable performance indicators should be defined in order to establish a

criterion for the evaluation and comparison of the alternative decisions.

These indicators may assume various forms in each different application, and may
include the following factors:

• monetary costs and payoffs;

• effectiveness and level of service;

• quality of products and services;

• flexibility of the operating conditions;

Prepared By: Prof. Ansari Mohd. Shahid (profshahid18@[Link]) Maharashtra College

 Business Intelligence [Link](I.T) SEM – VI UNIT - II

reliability in achieving the objectives.

Decision variables.

Symbolic variables representing alternative decisions should then be defined. For

example, if a problem consists of the formulation of a tactical production plan over the
medium term, decision variables should express production volumes for each product, for
each process and for each period of the planning horizon.

Numerical parameters.

It is also necessary to accurately identify and estimate all numerical parameters required
by the model. In the production planning example, the available capacity should be
known in advance for each process, as well as the capacity absorption coefficients for
each combination of products and processes.

Mathematical relationships.

The final step in the formulation of a model is the identification of mathematical

relationships among the decision variables, the numerical parameters and the
performance indicators defined during the previous phases.

Development of Algorithms

• Once a mathematical model has been defined, one will naturally wish to proceed with its
solution to assess decisions and to select the best alternative.
• In other words, a solution algorithm should be identified and a software tool that
incorporates the solution method should be developed or acquired.
• An analyst incharge of model formulation should possess a thorough knowledge of
current solution methods and their characteristics.

Implementation and Test

• When a model is fully developed, then it is finally implemented, tested and utilized in the
application domain.
• It is also necessary that the correctness of the data and the numerical parameters entered
in the model be assessed.
• These data usually come from a data warehouse or a data mart previously set up.
• Once the first numerical results have been obtained using the solution procedure devised,
the model must be validated by submitting its conclusions to the opinion of decision
makers and other experts in the application domain. A number of factors should be taken
into account at this stage:

• the plausibility and likelihood of the conclusions achieved;

• the consistency of the results at extreme values of the numerical parameters;

Prepared By: Prof. Ansari Mohd. Shahid (profshahid18@[Link]) Maharashtra College

 Business Intelligence [Link](I.T) SEM – VI UNIT - II

• the stability of the results when minor changes in the input parameters are introduced.

Classes of models

• There are several classes of mathematical models for decision making, which in turn can
be solved by a number of alternative solution techniques.
• Each model class is better suited to represent certain types of decision-making processes.
• In this section we will cover the main categories of mathematical models for decision
making, including:

• Predictive models;

• Pattern recognition and learning models;

• Optimization models;

• Project management models;

• Risk analysis models;

• Waiting line models.

Predictive Models

• Predictive models play a primary role in business intelligence systems, since they are
logically placed upstream with respect to other mathematical models and, more generally,
to the whole decision-making process.
• Predictions allow input information to be fed into different decision-making processes,
arising in strategy, research and development, administration and control, marketing,
production and logistics.
• Basically, all departmental functions of an enterprise make some use of predictive
information to develop decision making.

Pattern recognition and machine learning models

• The purpose of pattern recognition and learning theory is to understand the mechanisms
that regulate the development of intelligence, understood as the ability to extract
knowledge from past experience in order to apply it in the future.
• Mathematical models for learning can be used to develop efficient algorithms that can
perform such task.

Prepared By: Prof. Ansari Mohd. Shahid (profshahid18@[Link]) Maharashtra College

 Business Intelligence [Link](I.T) SEM – VI UNIT - II

• This has led to intelligent machines capable of learning from past observations and
deriving new rules for the future, just like the human mind is able to do with great
effectiveness due to the sophisticated mechanisms developed and fine-tuned in the course
of evolution.
• Mathematical models for learning have two primary objectives.
• The purpose of interpretation models is to identify regular patterns in the data and to
express them through easily understandable rules and criteria.
• Prediction models help to forecast the value that a given random variable will assume in
the future, based on the values of some variables associated with the entities of a
database.

Optimization Models

• Many decision-making processes faced by companies or complex organizations can be

cast according to the following framework:
• given the problem at hand, the decision maker defines a set of feasible decisions and
establishes a criterion for the evaluation and comparison of alternative choices, such as
monetary costs or payoffs.
• At this point, the decision maker must identify the optimal decision according to the
evaluation criterion defined, that is, the choice corresponding to the minimum cost or to
the maximum payoff.
• In general, optimization models arise naturally in decision-making processes where a set
of limited resources must be allocated in the most effective way to different entities.
• These resources may be personnel, production processes, raw materials, components or
financial factors.

Project management models

• A project is a complex set of interrelated activities carried out specific goal, which may
represent an industrial plant, a building, an information system, a new product or a new
organizational structure, depending on the different application domains.
• The execution of the project requires a planning and control process for the
interdependent activities as well as the human, technical and financial resources
necessary to achieve the final goal.
• Project management methods are based on the contributions of various disciplines, such
as business organization, behavioral psychology and operations research.

Prepared By: Prof. Ansari Mohd. Shahid (profshahid18@[Link]) Maharashtra College

 Business Intelligence [Link](I.T) SEM – VI UNIT - II

Risk analysis models

• Some decision problems can be described according to the following conceptual

paradigm: the decision maker is required to choose among a number of available
alternatives, having uncertain information regarding the effects that these options may
have in the future
• For example, assume that senior management wishes to evaluate different alternatives in
order to increase the company’s production capacity. On the one hand, the company may
build a new plant providing a high operating efficiency and requiring a high investment
cost. On the other hand, it may expand an existing plant with a lower investment but with
higher operating costs.

Waiting line models

• The purpose of waiting line theory is to investigate congestion phenomena occurring

when the demand for and provision of a service are stochastic in nature.
• If the arrival times of the customers and the duration of the service are not known
beforehand in a deterministic way, conflicts may arise between customers in the use of
limited shared resources. As a consequence, some customers are forced to wait in a line.
• A waiting line system is made up of three main components: a source generating a
stochastic process in which entities, also referred to as customers, arrive at a given
location to obtain a service; a set of resources providing the service; a waiting area able
to receive the entities whose requests cannot immediately be satisfied.
• Waiting line models allow the performance of a system to be evaluated once its structure
has been defined, and therefore are mostly useful within the system design phase.

Question Bank

1) Define mathematical model? Explain the structure of mathematical model?

2) Define mathematical model? Explain its type.
3) Draw and explain the development process of model.
4)List all the classes of model and explain the following
a) Predictive models;
b)Pattern recognition and learning models;
c)Optimization models;

5) Explain the following classes of model used in business intelligence

a)Project management models;
b)Risk analysis models;
c) Waiting line models.

Prepared By: Prof. Ansari Mohd. Shahid (profshahid18@[Link]) Maharashtra College