What is predictive analytics?

Predictive analytics is a branch of advanced analytics that makes predictions about future
outcomes using historical data combined with statistical modeling, data mining techniques
and machine learning. Companies employ predictive analytics to find patterns in this data to
identify risks and opportunities. Predictive analytics is often associated with big data and data
science.

Today, companies today are inundated with data from log files to images and video, and all of
this data resides in disparate data repositories across an organization. To gain insights from this
data, data scientists use deep learning and machine learning algorithms to find patterns and make
predictions about future events. Some of these statistical techniques include logistic and linear
regression models, neural networks and decision trees. Some of these modeling techniques use
initial predictive learnings to make additional predictive insight.

 Predictive analytics uses statistics and modeling techniques to determine future

performance.
 Industries and disciplines, such as insurance and marketing, use predictive techniques to
make important decisions.
 Predictive models help make weather forecasts, develop video games, translate voice-to-
text messages, customer service decisions, and develop investment portfolios.
 People often confuse predictive analytics with machine learning even though the two are
different disciplines.
 Types of predictive models include decision trees, regression, and neural networks.

Types of predictive modeling

There are three common techniques used in predictive analytics: Decision trees, neural networks,
and regression. Read more about each of these below.
Decision Trees
If you want to understand what leads to someone's decisions, then you may find decision trees
useful. This type of model places data into different sections based on certain variables, such as
price or market capitalization. Just as the name implies, it looks like a tree with individual
branches and leaves. Branches indicate the choices available while individual leaves represent a
particular decision.
Decision trees are the simplest models because they're easy to understand and dissect. They're
also very useful when you need to make a decision in a short period of time.6
Regression
This is the model that is used the most in statistical analysis. Use it when you want to determine
patterns in large sets of data and when there's a linear relationship between the inputs. This
method works by figuring out a formula, which represents the relationship between all the inputs
found in the dataset. For example, you can use regression to figure out how price and other key
factors can shape the performance of a security.6
Neural Networks
Neural networks were developed as a form of predictive analytics by imitating the way the
human brain works. This model can deal with complex data relationships using artificial
intelligence and pattern recognition. Use it if you have several hurdles that you need to overcome
like when you have too much data on hand, when you don't have the formula you need to help
you find a relationship between the inputs and outputs in your dataset, or when you need to make
predictions rather than come up with explanations

Predictive analytics models are designed to assess historical data, discover patterns, observe
trends, and use that information to predict future trends. Popular predictive analytics models
include classification, clustering, and time series models.

Classification models

Classification models fall under the branch of supervised machine learning models. These
models categorize data based on historical data, describing relationships within a given dataset.
For example, this model can be used to classify customers or prospects into groups for
segmentation purposes. Alternatively, it can also be used to answer questions with binary
outputs, such answering yes or no or true and false; popular use cases for this are fraud detection
and credit risk evaluation. Types of classification models include logistic regression, decision
trees, random forest, neural networks, and Naïve Bayes.
Clustering models

Clustering models fall under unsupervised learning. They group data based on similar attributes.
For example, an e-commerce site can use the model to separate customers into similar groups
based on common features and develop marketing strategies for each group. Common clustering
algorithms include k-means clustering, mean-shift clustering, density-based spatial clustering of
applications with noise (DBSCAN), expectation-maximization (EM) clustering using Gaussian
Mixture Models (GMM), and hierarchical clustering.

Time series models

Time series models use various data inputs at a specific time frequency, such as daily, weekly,
monthly, et cetera. It is common to plot the dependent variable over time to assess the data for
seasonality, trends, and cyclical behavior, which may indicate the need for specific
transformations and model types. Autoregressive (AR), moving average (MA), ARMA, and
ARIMA models are all frequently used time series models. As an example, a call center can use
a time series model to forecast how many calls it will receive per hour at different times of day.

Predictive analytics industry use cases

Predictive analytics can be deployed in across various industries for different business problems.
Below are a few industry use cases to illustrate how predictive analytics can inform decision-
making within real-world situations.

 Banking: Financial services use machine learning and quantitative tools to predict credit
risk and detect fraud. As an example, BondIT is a company that specializes in fixed-
income asset-management services. Predictive analytics allows them to support dynamic
market changes in real-time in addition to static market constraints. This use of
technology allows it to both customize personal services for clients and to minimize risk.
 Healthcare: Predictive analytics in health care is used to detect and manage the care of
chronically ill patients, as well as to track specific infections such as sepsis. Geisinger
Health used predictive analytics to mine health records to learn more about how sepsis is
diagnosed and treated. Geisinger created a predictive model based on health records for
 more than 10,000 patients who had been diagnosed with sepsis in the past. The model
yielded impressive results, correctly predicting patients with a high rate of survival.
 Human resources (HR): HR teams use predictive analytics and employee survey
metrics to match prospective job applicants, reduce employee turnover and increase
employee engagement. This combination of quantitative and qualitative data allows
businesses to reduce their recruiting costs and increase employee satisfaction, which is
particularly useful when labor markets are volatile.
 Marketing and sales: While marketing and sales teams are very familiar with business
intelligence reports to understand historical sales performance, predictive analytics
enables companies to be more proactive in the way that they engage with their clients
across the customer lifecycle. For example, churn predictions can enable sales teams to
identify dissatisfied clients sooner, enabling them to initiate conversations to promote
retention. Marketing teams can leverage predictive data analysis for cross-sell strategies,
and this commonly manifests itself through a recommendation engine on a brand’s
website.
 Supply chain: Businesses commonly use predictive analytics to manage product
inventory and set pricing strategies. This type of predictive analysis helps companies
meet customer demand without overstocking warehouses. It also enables companies to
assess the cost and return on their products over time. If one part of a given product
becomes more expensive to import, companies can project the long-term impact on
revenue if they do or do not pass on additional costs to their customer base. For a deeper
look at a case study, you can read more about how FleetPride used this type of data
analytics to inform their decision making on their inventory of parts for excavators and
tractor trailers. Past shipping orders enabled them to plan more precisely to set
appropriate supply thresholds based on demand.

Benefits of predictive modeling

An organization that knows what to expect based on past patterns has a business advantage in
managing inventories, workforce, marketing campaigns, and most other facets of operation.
  Security: Every modern organization must be concerned with keeping data secure. A
combination of automation and predictive analytics improves security. Specific patterns
associated with suspicious and unusual end user behavior can trigger specific security
procedures.
 Risk reduction: In addition to keeping data secure, most businesses are working to
reduce their risk profiles. For example, a company that extends credit can use data
analytics to better understand if a customer poses a higher-than-average risk of
defaulting. Other companies may use predictive analytics to better understand whether
their insurance coverage is adequate.
 Operational efficiency: More efficient workflows translate to improved profit margins.
For example, understanding when a vehicle in a fleet used for delivery is going to need
maintenance before it’s broken down on the side of the road means deliveries are made
on time, without the additional costs of having the vehicle towed and bringing in another
employee to complete the delivery.
 Improved decision making: Running any business involves making calculated
decisions. Any expansion or addition to a product line or other form of growth requires
balancing the inherent risk with the potential outcome. Predictive analytics can provide
insight to inform the decision-making process and offer a competitive advantage.

Courtesy: IBM Resources