See discussions, stats, and author profiles for this publication at: https://www.researchgate.

net/publication/222470328

Artificial neural networks and their business applications

Article  in  Information & Management · November 1994

DOI: 10.1016/0378-7206(94)90024-8 · Source: DBLP

CITATIONS READS
163 273

1 author:

Eldon Li
National Chung Cheng University
119 PUBLICATIONS   3,290 CITATIONS   

SEE PROFILE

Some of the authors of this publication are also working on these related projects:

International Conference on Electronic Business View project

All content following this page was uploaded by Eldon Li on 27 July 2021.

The user has requested enhancement of the downloaded file.

 Artificial Neural Networks and their Applications in Business

by
The Pegasus Group:
Mario Rosso
Phillip Randolph

Submitted in partial fulfillment

of the requirements for the graduate course
MBA 253 Seminar in Information Techno logy
California State University Fresno
Fall 2001

Appendix A A -0
 Introduction and History

World War II and its aftermath produced an explosion of scientific research. During the

War, millions of dollars were spent on developing new technologies in an effort to speed the

process of attaining victory. After the war, however, scientist began to seek ways to build on

these newly developed technologies for peace-time purposes.

One such technology was the computer. While the earliest electronic computers were

little more than calculators, their development was seen as an overwhelming accomplishment in

the field of science and technology. Scientists from around the world rallied around this new

technology, and ideas and theories regarding how it could be used abounded. Of particular

interest to many scientists was the use of computers as a replacement for the human thinking

process. Thus, the field of Artificial Intelligence was created.

During the early 1950’s research involving the function of the human brain was

converging with research into computing. While biological scientists were developing theories

on how the brain works, mathematicians were researching the application of these theories to the

new field of computing. In 1956, researchers gathered at the Dartmouth Summer Research

Project on Artificial Intelligence, held at Dartmouth College. The first of its type, this gathering

produced two competing schools of thought for research into the field of Artificial Intelligence.

These were “Expert-Systems” and “Neural Computing.” Neural Computing advocates believed

that the processes by which the brain works could be reproduced through algorithmic modeling

to produce semi-reasoning computer programs. Expert-systems advocates, however, believed

that the process by which artificial intelligence was achieved was not of concern. The real

concern was the results produced by the process.

 Although the two competing schools of thought continued, Expert-Systems gained wide-

spread acceptance as the preferred method of developing artificial intelligence. As a result, ES

was able to solicit high levels of funding for research while Neural Computing took a back seat.

Recently, however, neural computing has seen a wide-spread resurgence due to the

limitations of ES. Expert systems typically require a complete understanding of the field in

which it is applied. An expert-systems approach to artificial intelligence requires an intimate

understanding of interactions by a human ‘expert’ who could successfully predict outcomes.

With ES, an “expert would help to program a computer to mimic that understanding so that it

could ultimately make its own predictions.” Essentially, the expert codifies his human

knowledge into a set of rules which will guide the computer in determining the proper outcomes.

The limitations, however, are that these systems can only be applied where human experts exist.

In areas where there are no real experts, such as in accurately predicting the growth or decline of

the economy, a different approach is required. Many computer scientists believe that neural

computing in the form of Neural Networks may fill this gap in artificial intelligence.

Neural Networks

Professor Kevin Gurney of the University of Sheffield, defines a Neural Network as “an

interconnected assembly of simple processing elements, units or nodes, whose functionality is

loosely based on the animal neuron. The processing ability of the network is stored in the inter-

unit connection strengths, or weights, obtained by a process of adaptation to, or learning from, a

set of training patterns.” (http://www.shef.ac.uk/psychology/gurney/notes/l1/l1.html)

Neural Networks, in contrast to Expert systems, do not require an explicit set of rules.

Instead, the logic behind Neural Networks stems from the accepted biological model of how the
brain works. The network makes up its own rules that match the data it receives to the result it's

told is correct.

Neural Networks, like the brain, consist of numerous artificial “neurons” or processor

units. Each unit receives inputs, both excitatory and inhibitory, from a number of other units

and, if the strength of the signal exceeds a given threshold, sends signals to other units. The

action, so to speak, is in the connections among these units. Herb Brody of Technology Review

states, “Each neuron takes many input values, multiplies each by a "weighting" factor, adds

together the products of these multiplications, and mathematically operates on this sum to

produce another set of values. These numbers may translate directly into an answer--say, the

identity of a spoken word or a written character.”

The term “Neural Network” is inherently a biological one. While the term Neural

Network can be used to define either a network of interconnected, organic nerve cells in

biological organisms, the subject of this work is to identify attributes and applications of

computer-based Neural Network systems. A more correct term for software-based Neural

Networks would be Artificial Neural Networks or ANN. For the purpose of simplicity, from this

point forward, the term Neural Network is used throughout this work to describe computer-based

ANNs.

Initially, a Neural Network must undergo a period of training to develop its “own rules.”

During the training phase, the network is fed a stream or batch of input data, and it determines

the strength or weight of the relationships between each variable and a given output. The

training process determines input weights that will allow a Neural Network to function properly

based on the training data. Provided that you train a Neural Network with appropriate and

complete data, the network will determine appropriate outputs from inputs that are slightly
different from inputs that are entered during training. In other words, as the patterns of

relationships are determined between the inputs and the given outputs, the network can predict

different outcomes based on variations among various input variables.

The real “intelligence” behind Neural Networks is its ability to automatically make

corrections in the weights and relationships it gives to each variable entered. This is through a

method called “backpropagation.” As the network determines the patterns, relationships,

interaction effects, and weights of each variable as they are related to a given output, a set of

“rules” is developed. However, if more data is entered into the system in the form of inputs and

outputs, the network will test its set of rules. If the rules do not produced the desired outputs, the

network goes back to determine what rules need to be changed. In essence, the backpropagation

process adjusts the weights of the various relationships until they meet the given output. The

weight of each relationship or variable is increased or decreased in small increments until the

weights that produce the proper output are determined. As the proper output is attained, the

network develops a new set of “rules” to guide itself in making new outputs.

NEURAL NETWORK APPLICATIONS

Data Mining

Dramatic reductions in the cost of data storage have facilitated a substantial increase in

the amount of data currently being collected and stored by organizations. In order for managers

to gain value from this stored data and to improve the decision-making process, hidden patterns

must be discovered. Neural networks are well-suited to the task of recognizing patterns in

enormous amounts of data such as is commonly found in data warehouses. Some of the

attributes of Neural Networks that make possible effective data mining activities include the

ability to explore all possible interrelationships among key elements, model complicated
problems and multi-dimensional data and execute pattern extraction with greater speed than

conventional tools.

Marketing

Forecasting retail sales is necessary to make decisions relating to efficient capacity

planning. Issues such as ordering of raw materials, manpower requirements and inventory levels

depend on accurate and timely retail sales forecasts. Traditionally, Multiple Regression Analysis

(MRA) was performed to forecast sales. Utilizing Neural Network methods instead of MRA

results in improvements in accuracy and user friendliness.

Independent variables present at the input layer of a retail sales forecasting Neural

Network might include market demand for product, disposable income of consumers, size of

population, price of product, price of substitute products and price of complementary products.

Dependent variables at the output layer will include sales and the amount of time to reach a

break-even point.

Within the hidden layers of the Neural Network, weights for the network can be

initialized to arbitrary values. During the training phase, historical data is cycled through the

network a number of times. As differences are identified between computed outcomes and

correct historical data, the weights within the hidden layers will change and adapt. Finally,

actual data can be fed into the network and reliable forecasts can be computed.

Direct marketing is another application better served by Neural Network techniques than

traditional statistical methods. One of the objectives of direct marketing is to minimize the

amount of mailings to people who are not as likely to purchase the goods and services being

marketed. The conventional statistical technique utilized to achieve this objective is

Discriminant Analysis; however, Neural Network has proven to be a more efficient method for
identifying prospective customers. Independent variables such as age, sex, income, occupation,

education, social class and geographic location serve as the inputs for the network. The outputs

will include groups of prospective and non-prospective customers.

Target marketing seeks to segment a large market into one or more smaller groups. After

division, marketing campaigns can be focused on each segment independently . Cluster Analysis

is traditionally used as the conventional tool for market segmentation. In applying Neural

Network technology to this problem, independent variables such as demographics,

socioeconomic levels, geographic location, purchasing behavior, consumption and attitudes

toward product are presented at the input layer. The outputs of the network will include the

desired number of market segments.

Manufacturing

The pattern recognition capabilities of Neural Networks make them well-suited for

production environments. Applications in quality assurance, process control, process

optimization and failure prediction are becoming increasingly common and accepted.

Lucent Technologies, Inc. combines Neural Network with genetic algorithms to improve

process control in its semiconductor fabrication labs. Variations in film thickness increase

production costs and reduce semiconductor yields. The complex, 450-step production process

involved in the fabrication of Lucent’s semiconductors, combined with the small tolerances of

the devices, make it nearly impossible to identify which minute adjustments would have the most

impact on improving process control. To solve this problem, engineers trained a Neural Network

with plasma etching time data taken from a database of previous production lots. The resulting

system reduced film thickness variation from 730Å to 220Å.

 Another example of Neural Network applications in process control comes from the

petroleum industry. Quality attributes for gasoline, such as octane, can be inferred through the

use of Neural Networks. Traditionally, such measures of quality had to be obtained during

processing using physical analyzers such as gas chromatographs. This physical analysis method

caused delays in production and required the use of expensive, maintenance- intensive

equipment. Neural networks utilizing simple inputs such as temperature, flow rates and pressure

have reduced, and in some cases eliminated, the need for online physical analysis methods.

Automobile manufacturers are utilizing Neural Network technology to improve the

setting of warranty policies. By loading a Neural Network with sensor data obtained in new car

stress testing and then comparing this data with the patterns of previous model tests, durability

information can be deduced The resulting mean time between failure (MTBF) calculations are

important in the establishment of warranty policies.

Additional Neural Network applications in manufacturing include the Nestor

Development System (NDS) software package. Designed by Nestor, Inc. to run on personal

computers and Sun Microsystems workstations, it has the ability to recognize visual patterns for

part identification. The system can recognize parts even after slight modifications have been

made in their shape or in changing lighting environments. The NDS package also has

applications in electronics manufacturing due its ability to recognize patterns in electronic

signals.

Financial

Forecasting and prediction are important elements of investment decision making. While

most investment decisions are made by individuals with expertise in the field of finance, Neural

Networks are beginning to challenge the performance of human fund managers. Of the many
factors which make Neural Networks well suited to forecasting applications, the ability to

analyze enormous amounts of historical performance data and to identify relationships and

patterns in that data are of paramount importance. Data associated with financial markets is

readily available and can easily be codified for use in computerized Neural Network systems. In

addition, human factors such as ego and caution that may influence a decision maker’s judgment

are eliminated when using Neural Networks.

Financial forecasting Neural Networks can be separated into two categories. The first

group is concerned with prediction of future events from the analysis of known facts. Examples

of this type of Neural Network include programs that are designed to predict bankruptcies or

potential loan defaults. A second category of forecasting Neural Network is concerned with

Time Series Forecasting. Time Series Forecasting examines past events and data and attempts to

predict future trends. An example of this type of Neural Network application includes systems

that are used to predict stock and bond market trends and prices.

As is the case with all Neural Networks, an investment forecasting Neural Network must

be trained to recognize positive and negative relationships to produce useful outputs. Training is

accomplished by utilizing either a supervised or an unsupervised learning technique. Supervised

learning involves comparing the outputs of the Neural Network to actual historical outputs and

adjusting the weights of the hidden layer to minimize the difference between actual and

calculated results. Unsupervised learning does not involve the comparison of calculated and

actual outputs. Instead, unsupervised learning methods rely on the network itself to find positive

relationships within the large amounts of data that are fed into it.

To illustrate the successfulness of Neural Networks in financial applications, four

examples are provided herein. The first example involves an experiment conducted in 1990
involving stock market prediction. Using a Neural Network to analyze data from the Tokyo

Exchange, researchers were able to predict the future direction pattern of the market with 94

percent accuracy. A second example involves bond rating. A sample of bond issues from 40

companies were used to test a Neural Network’s ability to rate bonds. Thirty of the bond issues

were used as input data to train the network while the remaining ten were used to compare

against the results generated by the network. The Neural Network was able to predict the bond

ratings with an accuracy rate of 88 percent, compared with only 65 percent for regression

analysis techniques. Third in the list of examples involves an Neural Network used by LBS

Capital Management Inc. in Clearwater, Florida. The system was used to pick stocks for

purchasing between the years 1991 and 1993. It performed consistently better than the Standard

& Poor’s 400 Index each year. A final example involves the commodities trading market. A

Neural Network trained with three years of trading data realized a 52 percent profit after

operating for six months on an original investment of $3,000. Figure 1 below illustrates a

sample of results from a number of Neural Network investment experiments.

Accuracy in Predicting Investments

90%
80%
70% S&P 500 Euro
60% NIKKEI Crude Oil Yen
50%
Futures
40%
30%
20%
10%
0%

Figure 1Neural Network Investment Accuracy

 Risk Assessment

Applications in risk analysis stand out as some of the most successful and wide-spread

Neural Network business applications developed to date. Many large financial institutions ha ve

incorporated Neural Network based fraud detection systems into their organizations. One such

system, Visa U.S.A.’s Cardholder Risk Identification Service, produces an alert when irregular

purchasing behavior is detected.

Credit ratings can also be ge nerated using systems such as Neural Technologies’ Decider.

Standard & Poors (S&P) is currently using Decider as the engine powering its Neural Network

based CreditModel system. CreditModel is an Internet delivered service that allows financial

institutions doing business with S&P to rate the credit risk of potential customers.

CreditModel’s inputs include the customer’s revenues, debt load, and prior S&P credit ratings.

Using CreditModel’s Neural Network to determine a bank’s credit rating has brought the cost of

S&P’s service down from $40,000, using human analysis, to $400. Similarly, the process of

approving or denying mortgages and loans can be delegated to an Neural Network.

Sears Mortgage Corporation is using Neural Networks to streamline and augment its

mortgage analysis. Up to 70 percent of Sears’ “clear-cut” mortgage applications are processed

by its Neural Network, while human underwriters scrutinize the remaining “tough” applications.

Among the thirty pieces of data input into the Sears’ neural net are applicant’s zip code, age of

the home, appraised value of the home, monthly income, proposed housing expense and credit

rating. The network is initially trained by running iterations on 2,500 application acceptances

and 2,500 rejections. Outputs simply establish whether the application is to be accepted or

rejected.
 Other Applications

The number of fields benefiting from Neural Network technology is vast, and identifying

them all is beyond the scope of this report. Many of these applications are difficult to classify

but deserve to be noted. Among these are systems that utilize the pattern recognition strengths of

Neural Networks in applications such as the reading of Japanese Kanji characters and English

hand writing on checks, identifying battle-field targets and classifying radar signals, and locating

features on seismic maps that aid petrochemical industry geologists in the exploration of new

natural resources.

Two of the most surprising and interesting applications of Neural Networks technology

discovered while researching this report include race horse paternity determination and network

failure prediction systems.

Researchers at the University of California School of Veterinary Medicine at Davis are

combining Neural Network powered pattern recognition systems with video cameras to verify

race horse pedigree. Proof of parentage, verified through a series of 142 reaction tests on a

sample of blood, is a requirement for thoroughbred breeders to race a horse. Laboratories at

Davis were becoming overwhelmed by as many as 72,000 reaction tests in a single day. To

solve this problem, scientists at Davis installed a Neural Network system produced by San

Diego-based, Science Applications International Corporation. The successful system has

inspired research into similar biological testing applications for humans.

Neural network based failure prediction and alert systems, such as Computer Associates’

Neugents product, seek to alert engineers of impending failures before an event actually occurs.

Neugents software is currently being used to identify and learn historical patterns in data network
infrastructures to facilitate preventative corrective action before a system fails or its performance

degrades.

Summary and Conclusions

The application of Artificial Neural Networks in business and industry is an emerging

field with enormous potential. While still largely unknown or misunderstood, this rapidly

evolving field holds promise for a vast number of tasks that were previously accomplished

through human cognitive activity. Throughout the course of this study, Neural Networks were

defined and a number applications were highlighted. While not an exhaustive list, many of these

applications, such as those in fraud detection, process control, market prediction and pattern

recognition, should give the reader an introductory understanding of Artificial Neural Networks

and their amazing potential. Neural Networks are at last being touted as a worthy alternative to

their Artificial Intelligence counterparts, Expert Systems. In the future, humans will delegate

more and more of their cognitive and decision making activities to Neural Networks and Expert

Systems. This fact should make for some exciting possibilities and concerns that deserve further

study.
 Bibliography

Ady, Snit K. “Neural Network: Classification Method Helps Seismic Interval

Interpretation.” The Oil and Gas Journal 96, no. 37, 14 Sept 1998, 47.

Brambilla, A. and F. Trivella. “Estimate Product Quality with ANNs.” Hydrocarbon

Processing 75, no. 9 (Sept 1996): 61-66.

Brody, Herb. “The Neural Computer.” Technology Review 93, no. 6 (August-Sept 1990):
42-49.

Cheng, Wei, Bruce W. McClain and Christopher Kelly. “Artificial Neural Networks
Make Their Mark as a Powerful Tool for Investors.” Review of Business 18, no. 4
(Summer 1997): 4-10.

Davidson, Clive. “A Mind of their Own.” Computer Weekly, 14 Jan 1993, 26-24.

Enticknap, Nicholas. “Knowledge is the Key.” Computer Weekly, 30 Nov 1995, 48-49.

“Fab Control gets Neural Guidance.” Electronic Engineering Times, 16 December 1996.

FU, LIMIN. “Knowledge Discovery Based on Neural Networks.” Communications of the

ACM 42, no. 11 (Nov 1999): 47.

Getz, Arlene. “Out in The Cold: Travel nightmare: far from home with a frozen credit-
card account.” Newsweek, 30 Oct. 2000, 102.

Gianturco, Michael. “The Eye is a Computer.” Forbes 146, no. 1. 12 Nov 1990, 32-35.

Hoffman, Thomas. “Neural Nets Spot Credit Risks.” Computerworld, 16 July 1999, 38.

Knight, Kevin. “Connectionist Ideas and Algorithms.” Communications of the ACM 33,
no. 11 (Nov 1990): 58-75.

“Planes That Think for Themselves.” Poptronics 1, (July 2000): 15.

Perkin, Julian. “Survey – FT-IT: Software Agents ‘Negotiate’ Production Schedules:

Artificial Intelligence in Manufa cturing.” Financial Times (London), 1 November 2000,
7.

Quitttner, Jeremy. “Credit Union Unit Gets New Tools to Fight Fraud.” American
Banker 161, no. 64, 3 April 1996, 15.

Ray, Gary. “Neural Networks.” PC Week, 5 Sept 1988, 86, 5.

Roberts, Leslie. “Are Neural Nets Like the Human Brain?” Science 243, no 4890 (Jan
27, 1989): 481-482.
Romberg, Denise. “CA’s ‘Neugents’ Forcast Failures.” Computing Canada 25, 1 Jan
1999, 17.

Smith, J. Clarke. “A Neural Network – Could it Work for You?” Financial Executive 6,
no. 3 (May-June 1990): 26-31.

Venugopal,V. and W. Baets. “Neural Networks and their Applications in Marketing

Management.” Journal of Systems Management 45, no. 9 (Sept 1994): 16-22.

Wright, Maury. “Neural Networks Tackle Real-World Problems.” EDN, 8 Nov 1990, 79-
87.
APPENDIX A Commercial Neural Network Software Applications
(source: http://www.emsl.pnl.gov:2080/proj/neuron/neural/products/)

Marketing

• Adaptive Decision Systems

o Application: evaluates direct marketing decisions
• BehavHeuristics Inc.
o Application: forecasts demand of airline flights
o Product: Airline Marketing Assistant
• Britvic
o Application: predicting sales of soft drinks (e.g., Tango Orange Man)
• Churchill Systems
o Application: optimize marketing Strategy
o Product: The Target Market System
o Customers: Veratex Corp.
• Microsoft
o Application: direct mail marketing
• NeuralWare
o Application: determine which customers should receive catalogs
o Customer: Spiegal Inc.
• HNC Software Inc.
o Application: predictive modeling system for direct marketers
o Product: DataBase Mining® Marksman
• HNC Software Inc.
o Application: Web advertising placement server
o Product: SelectCast
• major US supermarket chain
o Application: finding the connection between the sales of diapers and beer

Real Estate

• Day & Zimmerman, Inc.

o Application: real estate appraisal
• HNC Software
o Application: property valuation system
o Product: Automated Real Estate Appraisal System (AREAS)

Market Trading

• Carl & Associates

o Application: stock forecasting
• Citibank
o Application: trends analysis in international markets
• Daiwa Securities Co., Ltd. and NEC Corporation
o Application:stock price forecasting
 • Econostat Ltd.
o Application: bond portfolio management
o Product: Global Bond
• Gerber Baby Foods
o Application: manage cattle futures trading
• G.R. Pugh & Company
o Application: corporate bond rating
• John Deere & Company
o Application: pension fund management
• LBS Capital Management Inc.
o Application: mutual fund management
• Mellon Equity Associates
o Application: portfolio management
• Neural Applications Corporation
o Applications: stock forecasting
o Product: NetProfit
• NeuroDimension, Inc.
o Application: Technical analysis and prediction of stocks and other financial data
o Product: TradingSolutions
• O'Sullivan Brothers Investments, Ltd.
o Application: monetary market trading
• Walkrich Investment Advisors
o Application: common stock valuation

Fraud Detection

• Dunn and Bradstreet

o Application: check approval
• HNC Software
o Application: credit card fraud detection
o Product: Falcon
o Customers: First Bank USA, Household Credit Services, and National Colonial
Bank USA
• MasterCard
o Application: identify deviations in spending habits
• Nestor Inc. and Fraud Detection Systems
o Application: credit card fraud detection
o Customers: Bank of America, Canadian Imperial Bank of Commerce, and
Europay International S.A. Belgium
• NeuroMetric Vision System Inc.
o Application: signature verification from checks
o Product: Check Signature Verification System
o Customers: US banking industry and Federal Reserve System
• Visa
o Application: identify deviations in spending habits
Credit Rating

• Adaptive Decision Systems

o Application: credit scoring
• Chase Financial Technologies
o Application: forecasting credit worthiness
o Product: Creditview
• HNC Software
o Application: mortgage underwriting and risk- management
o Product: Colleague
o Product: Aquarius

Process Controllers

• Fujitsu
o Application: controller for continuous casting
• Honeywell
o Application: process control systems
• Neural Applications Corporation
o Application: controller for steel making
o Product: Intelligent Arc Furnace
• Nippon Steel
o Application: controller for continuous casting
• Pavilion Technologies
o Application: process control, waste reduction
o Product: Process Insights®
o Customers: Eastman Kodak
• Siemens
o Application: process control of rolling mills
o Customers: Krupp Hoesch Stahl, HYLSA, Thyssen, Voest Alpine, Hanbo,
Gallatin Steel,
• Texaco's Puget Sound Refinery
o Application: refinery process control system

Quality Control Systems

• Anheuser-Busch
o Application: beer testing
• Applied Intelligent Systems
o Application: vision recognition systems
• CTS Electronics
o Application: loudspeaker defect classifications
• Dunlop
o Application: tire testing
• Intel
o Application: computer chip manufacturing quality control
 • Monsanto
o Application: predicting quality of plastics
• Netrologic, Inc.
o Application: welding quality control
• NLK - Celpap
o Application: predicting quality of paper
• Volvo
o Application: diesel knock testing, paint inspection

View publication stats