Introduction to Business Analytics

Second Sessional Important Questions

1. Explain Prescriptive Analytics with suitable Example.

What Is Prescriptive Analytics?

Prescriptive analytics is a type of data analytics that attempts to answer the question “What
do we need to do to achieve this?” It involves the use of technology to help businesses make
better decisions through the analysis of raw data.

Prescriptive analytics specifically factors information about possible situations or scenarios,

available resources, past performance, and current performance, and suggests a course of
action or strategy. It can be used to make decisions on any time horizon, from immediate to
long-term. It is the opposite of descriptive analytics, which examines decisions and
outcomes after the fact.

 Prescriptive analytics is a form of data analytics that tries to answer “What do we

need to do to achieve this?”
 It uses machine learning to help businesses decide a course of action based on a
computer program’s predictions.
 Prescriptive analytics works with predictive analytics, which uses data to determine
near-term outcomes.
 When used effectively, it can help organizations make decisions based on facts and
probability-weighted projections instead of conclusions based on instinct.
 Prescriptive analytics isn’t fool proof—it’s only as effective as its inputs.

How Prescriptive Analytics Works

Prescriptive analytics tries to answer the question “How do we get to this point?” It relies
on artificial intelligence (AI) techniques, such as machine learning (the ability of a computer
program without additional human input), to understand and advance from the data it
acquires, adapting all the while.
Machine learning makes it possible to process a tremendous amount of data available today.
As new or additional data becomes available, computer programs adjust automatically to
make use of it, in a process that is much faster and more comprehensive than human
capabilities could manage.

Prescriptive analytics works with another type of data analytics: predictive analytics, which
involves the use of statistics and modelling to determine future performance, based on
current and historical data. However, it goes further: Using predictive analytics’ estimation
of what is likely to happen, it recommends what future course to take.

Advantages and Disadvantages of Prescriptive Analytics

Advantages
Prescriptive analytics can cut through the clutter of immediate uncertainty and changing
conditions. It can help prevent fraud, limit risk, increase efficiency, meet business goals, and
create more loyal customers. When used effectively, it can help organizations make
decisions based on highly analyzed facts rather than jump to under informed conclusions
based on instinct.

Prescriptive analytics can simulate the probability of various outcomes and show the
probability of each, helping organizations to better understand the level of risk and
uncertainty they face than they could be by relying on averages. Organizations that use it can
gain a better understanding of the likelihood of worst-case scenarios and plan accordingly.

Disadvantages
Prescriptive analytics is not foolproof, though. It is only effective if organizations know
what questions to ask and how to react to the answers. As such, it’s only effective if its
inputs are valid. If the input assumptions are invalid, then the output results will not be
accurate.

This form of data analytics is only suitable for short-term solutions. This means businesses
shouldn’t use prescriptive analytics to make any long-term ones. That’s because it becomes
more unreliable if more time is needed.
Not all prescriptive analytics providers are made the same. So it’s important for businesses
to carefully consider the technology and who provides it. Some may provide real, concrete
results, while others make the promise of big data and fail to deliver.

Pros

 Prevents fraud, reduces risk, and increases efficiency, among other things

 Simulates outcomes and shows probability of each

Cons

 Only as effective as the inputs

 Not suitable for long-term predictions/solutions

 Some big data providers provide results, while others don’t

Example- You can take help of Decision Tree Analysis and take any examples from the
business world and build modelling around it.

• Decision trees are organized as follows: An individual makes a big decision, such as
undertaking a capital project or choosing between two competing ventures. These
decisions, which are often depicted with decision nodes, are based on the expected
outcomes of undertaking particular courses of action.
2. Differentiate between Prescriptive and Predictive Analytics.

Both predictive and prescriptive analytics leverage statistical methods and modeling to assess
future performance based on current and historical data. Predictive analytics focuses on
forecasting outcomes to help you make decisions. Prescriptive analytics takes the extra step
to recommend the specific, optimal course of action or strategy for you to take. Both types of
advanced analytics simplify complex situations and help you make better, data-driven
decisions.

Predictive Vs. Prescriptive: 10 Key differences

Parameters Predictive Prescriptive

Output Provides a forecast of possible Gives a specific
outcomes but gives no guidance. recommendation for a given
Answers the question: “What will
 happen?” business decision.
Answers the question:
“What should we do?”
Data Requirement Relies on historical and current Requires not only historical
big data for trend analysis. and current big data but also
additional contextual
information for decision
optimization.
Complexity of Analysis Involves analyzing patterns and Requires more complex
trends. analysis, considering
multiple variables and
potential scenarios.
Scope Typically only focuses on Prescriptive analytics takes
limited aspects of your business. interdependencies into
This can result in optimizing account and models your
one area at the expense of entire business.
others.
Models Hypotheses of predictive ML models consider all
models are typically based on variables and potential
predetermined scenarios and outputs to more accurately
these scenarios usually have a represent how your
limited number of options. organization operates.
Human Bias Requires human decision Data-driven
making because the outputs do recommendations via
not provide guidance. artificial intelligence
remove the risk of personal
bias.
Time Sensitivity Emphasizes future predictions Offers real-time or near-
based on historical and current real-time recommendations
data. for immediate decision-
making.
Feedback Loop Limited feedback loop for Incorporates continuous
model refinement. feedback for ongoing model
improvement and
adaptation.
Adaptability to Change May not easily adapt to Designed to be adaptive,
changing conditions without considering dynamic factors
retraining models. and adjusting
recommendations
accordingly.
Risk Management Provides actionable insights into Actively manages and
potential risks based on mitigates risks by
historical trends. recommending actions to
achieve desired outcomes.
3. Explain the concepts of Regression model. Explain with suitable example how Regression
model can be used for prediction.

Regression is a statistical method used in finance, investing, and other disciplines that
attempts to determine the strength and character of the relationship between a dependent
variable and one or more independent variables.

Linear regression is the most common form of this technique. Also called simple regression
or ordinary least squares (OLS), linear regression establishes the linear relationship between
two variables.

 Regression is a statistical technique that relates a dependent variable to one or more

independent variables.
 A regression model is able to show whether changes observed in the dependent
variable are associated with changes in one or more of the independent variables.
 It does this by essentially determining a best-fit line and seeing how the data is
dispersed around this line.
 Regression helps economists and financial analysts in things ranging from asset
valuation to making predictions.
 For regression results to be properly interpreted, several assumptions about the data
and the model itself must hold.

Understanding Regression

Regression captures the correlation between variables observed in a data set and quantifies
whether those correlations are statistically significant or not.

The two basic types of regression are simple linear regression and multiple linear regression,
although there are nonlinear regression methods for more complicated data and analysis .
Simple linear regression uses one independent variable to explain or predict the outcome of
the dependent variable Y, while multiple linear regression uses two or more independent
variables to predict the outcome. Analysts can use stepwise regression to examine each
independent variable contained in the linear regression model.
Regression can help finance and investment professionals. For instance, a company might
use it to predict sales based on weather, previous sales, gross domestic product (GDP)
growth, or other types of conditions. The capital asset pricing model (CAPM) is an often-
used regression model in finance for pricing assets and discovering the costs of capital.

Calculating Regression

Linear regression models often use a least-squares approach to determine the line of best fit.
The least-squares technique is determined by minimizing the sum of squares created by a
mathematical function. A square is, in turn, determined by squaring the distance between a
data point and the regression line or mean value of the data set.

Once this process has been completed (usually done today with software), a regression model
is constructed. The general form of each type of regression model is:

Simple linear regression

Y=a+bX+u

Multiple linear regression:

Y=a+b1X1+b2X2+b3X3+...+btXt+uwhere:Y=The dependent variable you are trying to predi

ctor explainX=The explanatory (independent) variable(s) you are using to predict or associate
with Ya=The y-interceptb=(beta coefficient) is the slope of the explanatoryvariable(s)u=The r
egression residual or error termY=a+b1X1+b2X2+b3X3+...+btXt+uwhere:Y=The dependent
variable you are trying to predictor explainX=The explanatory (independent) variable(s) you
are using to predict or associate with Ya=The y-interceptb=(beta coefficient) is the slope of
the explanatoryvariable(s)u=The regression residual or error term
Example of Regression Analysis

Regression is often used to determine how specific factors—such as the price of a

commodity, interest rates, particular industries, or sectors—influence the price movement of
an asset. The aforementioned CAPM is based on regression, and it's utilized to project the
expected returns for stocks and to generate costs of capital. A stock’s returns are regressed
against the returns of a broader index, such as the S&P 500, to generate a beta for the
particular stock.
Beta is the stock’s risk in relation to the market or index and is reflected as the slope in the
CAPM. The return for the stock in question would be the dependent variable Y, while the
independent variable X would be the market risk premium.

Additional variables such as the market capitalization of a stock, valuation ratios, and recent
returns can be added to the CAPM to get better estimates for returns. These additional
factors are known as the Fama-French factors, named after the professors who developed the
multiple linear regression model to better explain asset returns.3

Why Is It Called Regression?

Although there is some debate about the origins of the name, the statistical technique
described above most likely was termed “regression” by Sir Francis Galton in the 19th
century to describe the statistical feature of biological data (such as heights of people in a
population) to regress to some mean level. In other words, while there are shorter and taller
people, only outliers are very tall or short, and most people cluster somewhere around (or
“regress” to) the average.4

Purpose of Regression Analysis

In statistical analysis, regression is used to identify the associations between variables

occurring in some data. It can show the magnitude of such an association and determine its
statistical significance. Regression is a powerful tool for statistical inference and has been
used to try to predict future outcomes based on past observations.

Interpreting a Regression Model

A regression model output may be in the form of Y = 1.0 + (3.2) X1 - 2.0(X2) + 0.21.

Here we have a multiple linear regression that relates some variable Y with two explanatory
variables X1 and X2. We would interpret the model as the value of Y changes by 3.2× for
every one-unit change in X 1 (if X1 goes up by 2, Y goes up by 6.4, etc.) holding all else
constant. That means controlling for X 2, X1 has this observed relationship. Likewise, holding
X1 constant, every one unit increase in X 2 is associated with a 2× decrease in Y. We can
also note the y-intercept of 1.0, meaning that Y = 1 when X 1 and X2 are both zero. The error
term (residual) is 0.21.2
Assumptions for Regression Models

To properly interpret the output of a regression model, the following main assumptions
about the underlying data process of what you are analyzing must hold:

 The relationship between variables is linear;

 There must be homoscedasticity, or the variance of the variables and error term must
remain constant;
 All explanatory variables are independent of one another;
 All variables are normally distributed

4. In the context of Regression Analysis, explain the following

• Residuals,

• Co-efficient of determination

• Regression Weights

• Intercepts

• Linear Vs. Non-linear relationships

Residuals: Residuals are the differences between the observed values and the
predicted values of the response variable (also known as dependent variable) in a
regression analysis. They represent the error or the deviation of the predicted values
from the actual values. Mathematically, the residuals are calculated as the difference
between the observed value and the predicted value for each data point. They are used
to evaluate the performance of the regression model and to detect outliers or patterns
in the data that are not explained by the model.

Coefficient of determination: The coefficient of determination, also known as

R-squared, is a statistical measure that represents the proportion of the variation in the
response variable that is explained by the regression model. It ranges from 0 to 1,
where a higher value indicates a better fit of the model to the data. The R-squared
value is calculated as the ratio of the explained variance to the total variance of the
response variable.
 Linear vs Non-linear relationships: Linear regression models assume that
there is a linear relationship between the independent variables and the dependent
variable. A linear relationship is a straight-line relationship, where the change in the
dependent variable is proportional to the change in the independent variable. Non-
linear regression models, on the other hand, assume that there is a non-linear
relationship between the variables, which can take the form of polynomial,
exponential or logarithmic relationships. Non-linear relationships are represented by
curved lines.

Regression weights/coefficients: Regression weights, also known as regression

coefficients, are the parameters of the regression model that are estimated from the
data. They represent the relationship between the independent variables and the
dependent variable. Each weight corresponds to an independent variable and
represents the change in the dependent variable for a one-unit change in the
independent variable, while holding all other independent variables constant.

Intercept: The intercept is the value of the dependent variable when all independent
variables are equal to zero. It represents the baseline value of the dependent variable
and it is one of the parameters of the regression model that is estimated from the data.
It can be interpreted as the expected value of the dependent variable when the
independent variables have no effect on it.

5. What do you understand by Time Series analysis? Explain its advantages in Business
Analytics.

“Time series analysis is a specific way of analyzing a sequence of data points collected over
an interval of time.”

In time series analysis, analysts record data points at consistent intervals over a set period of
time rather than just recording the data points intermittently or randomly. However, this type
of analysis is not merely the act of collecting data over time.

What sets time series data apart from other data is that the analysis can show how variables
change over time? In other words, time is a crucial variable because it shows how the data
adjusts over the course of the data points as well as the final results. It provides an additional
source of information and a set order of dependencies between the data.

Time series analysis typically requires a large number of data points to ensure consistency
and reliability. An extensive data set ensures you have a representative sample size and that
analysis can cut through noisy data. It also ensures that any trends or patterns discovered are
not outliers and can account for seasonal variance. Additionally, time series data can be used
for forecasting—predicting future data based on historical data.

Time series analysis helps organizations understand the underlying causes of trends or
systemic patterns over time. Using data visualizations, business users can see seasonal trends
and dig deeper into why these trends occur. With modern analytics platforms, these
visualizations can go far beyond line graphs.

When organizations analyze data over consistent intervals, they can also use time series
forecasting to predict the likelihood of future events. Time series forecasting is part
of predictive analytics. It can show likely changes in the data, like seasonality or cyclic
behavior, which provides a better understanding of data variables and helps forecast better.

For example, DPS analyzed five years of student achievement data to identify at-risk students
and track progress over time. Today’s technology allows us to collect massive amounts of
data every day and it’s easier than ever to gather enough consistent data for comprehensive
analysis.

Time series analysis is used for non-stationary data—things that are constantly fluctuating
over time or are affected by time. Industries like finance, retail, and economics frequently use
time series analysis because currency and sales are always changing. Stock market analysis is
an excellent example of time series analysis in action, especially with automated trading
algorithms. Likewise, time series analysis is ideal for forecasting weather changes, helping
meteorologists predict everything from tomorrow’s weather report to future years of climate
change. Examples of time series analysis in action include:

 Weather data

 Rainfall measurements

 Temperature readings
  Heart rate monitoring (EKG)

 Brain monitoring (EEG)

 Quarterly sales

 Stock prices

 Automated stock trading

 Industry forecasts

 Interest rates

Time Series Analysis Types

Because time series analysis includes many categories or variations of data, analysts
sometimes must make complex models. However, analysts can’t account for all variances,
and they can’t generalize a specific model to every sample. Models that are too complex or
that try to do too many things can lead to a lack of fit. Lack of fit or overfitting models lead to
those models not distinguishing between random error and true relationships, leaving analysis
skewed and forecasts incorrect.

Models of time series analysis include:

 Classification: Identifies and assigns categories to the data.

 Curve fitting: Plots the data along a curve to study the relationships of variables
within the data.

 Descriptive analysis: Identifies patterns in time series data, like trends, cycles, or
seasonal variation.

 Explanative analysis: Attempts to understand the data and the relationships within it,
as well as cause and effect.

 Exploratory analysis: Highlights the main characteristics of the time series data,
usually in a visual format.
  Forecasting: Predicts future data. This type is based on historical trends. It uses the
historical data as a model for future data, predicting scenarios that could happen along
future plot points.

 Intervention analysis: Studies how an event can change the data.

 Segmentation: Splits the data into segments to show the underlying properties of the
source information.

6. What is Factor Analysis? Explain its usefulness in Business Analytics.

Factor analysis, or correlational analysis, is a statistical technique that reduces a large number
of variables into a few data sets that are more manageable and understandable. This makes it
easier to work with research data. It can be an efficient way to simplify complex data sets
with many variables. The variables can form groups of categories, called factors, based on
observations. You may determine the similarities and differences between the factors to
establish a correlation between them.

Types of Factor Analysis

ypes of Factor Analysis

There are different methods that we use in factor analysis from the data set:

1. Principal component analysis

It is the most common method which the researchers use. Also, it extracts the maximum
variance and put them into the first factor. Subsequently, it removes the variance explained by
the first factor and extracts the second factor. Moreover, it goes on until the last factor.

2. Common Factor Analysis

It’s the second most favoured technique by researchers. Also, it extracts common variance and
put them into factors. Furthermore, this technique doesn’t include the variance of all variables
and is used in SEM.
3. Image Factoring

It is on the basis of the correlation matrix and makes use of OLS regression technique in order to
predict the factor in image factoring.

4. Maximum likelihood method

It also works on the correlation matrix but uses a maximum likelihood method to factor.

5. Other methods of factor analysis

Alfa factoring outweighs least squares. Weight square is another regression-based method that
we use for factoring.

Factor loading- Basically it the correlation coefficient for the factors and variables. Also, it
explains the variable on a particular factor shown by variance.

Eigenvalues- Characteristics roots are its other name. Moreover, it explains the variance shown
by that particular factor out of the total variance. Furthermore, commonality column helps to
know how much variance the first factor explained out of total variance.

Factor Score- It’s another name is the component score. Besides, it’s the score of all rows and
columns that we can use as an index for all variables and for further analysis. Moreover, we can
standardize it by multiplying it with a common term.

Rotation method- This method makes it more reliable to understand the output. Also, it affects
the eigenvalues method but the eigenvalues method doesn’t affect it. Besides, there are 5
rotation methods: (1) No Rotation Method, (2) Varimax Rotation Method, (3) Quartimax
Rotation Method, (4) Direct Oblimin Rotation Method, and (5) Promax Rotation Method.

Assumptions of Factor Analysis

Factor analysis has several assumptions. These include:

1. There are no outliers in the data.

2. The sample size is supposed to be greater than the factor.

3. It is an interdependency method so there should be no perfect multicollinearity between

the variables.

4. Factor analysis is a linear function thus it doesn’t require homoscedasticity between

variables.

5. It is also based on the linearity assumption. So, we can also use non-linear variables.
However, after a transfer, they change into a linear variable.

6. Moreover, it assumes interval data.

Key Concepts of Factor Analysis

It includes the following key concept:

Exploratory factor analysis- It assumes that any variable or indicator can be associated with any
factor. Moreover, it is the most common method used by researchers. Furthermore, it isn’t based
on any prior theory.

Confirmatory Factor Analysis- It is used to determine the factors loading and factors of
measured variables, and to confirm what it expects on the basis of pre-established assumption.
Besides, it uses two approaches:

1. The Traditional Method

2. The SEM Approach

Importance of correlational analysis

A correlational analysis is essential because it can describe a vast data set using fewer
dimensions than the original variables. It attempts to discover the unexplained factors that
influence how similar variables form co-variations among multiple observations. It provides
more details about concepts that a single variable may not accurately measure. This can be
helpful, especially in survey research, where the responses to each question represent an
outcome. Another importance of dimension reduction is that it helps uncover clusters of
reactions, making analyzing results more accessible and faster. For example, it can help
improve customer satisfaction by getting their feedback on products.

Business analysts use this process to derive conclusions from the data of their company or
business. They may use different techniques to determine the most accurate factors for a
particular data set. This can provide them with conclusions that help a company make
effective business decisions about their products, services, and daily operations. It can also
provide them with ways to increase customer satisfaction.

7. Classify the following into predictive and prescriptive Analysis. Write of about roles of
Predictive and prescriptive analysis in Business Analytics

• Regression Analysis
• Cluster Analytics
• Econometrics
• Time Series Analysis
• Text Analytics
• Web Analytics
• Factor Analytics
• Decision Tree Analytics
Predictive Analytics techniques-
 Regression Analysis
• Cluster Analytics
• Econometrics
• Time Series Analysis
• Factor Analytics
Prescriptive Analytics Techniques
• Text Analytics
• Web Analytics
• Decision Tree Analytics