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Contents
Foreword

Part I PRELIMINARIES

1 Introduction

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What Is Data Mining? . . . . . . . . . . . .

Where Is Data Mining Used? . . . . . . . . .
Origins of Data Mining . . . . . . . . . . . .
Rapid Growth of Data Mining . . . . . . . .
Why Are There So Many Different Methods?
Terminology and Notation . . . . . . . . . .
Road Maps to This Book . . . . . . . . . . .
Order of Topics . . . . . . . . . . . . . . . .

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Acknowledgments

1.1
1.2
1.3
1.4
1.5
1.6
1.7

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Preface to the first edition

Chapter

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Preface to the second edition

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2 Overview of the Data Mining Process

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2.1 Introduction . . . . . . . . . . . . . . .
2.2 Core Ideas in Data Mining . . . . . . . .
Classification . . . . . . . . . . . . . . .
Prediction . . . . . . . . . . . . . . . .
Association Rules . . . . . . . . . . . .
Predictive Analytics . . . . . . . . . . .
Data Reduction . . . . . . . . . . . . .
Data Exploration . . . . . . . . . . . . .
Data Visualization . . . . . . . . . . . .
2.3 Supervised and Unsupervised Learning
2.4 Steps in Data Mining . . . . . . . . . .
2.5 Preliminary Steps . . . . . . . . . . . .

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Organization of Datasets . . . . . . . . . . . . .
Sampling from a Database . . . . . . . . . . . .
Oversampling Rare Events . . . . . . . . . . . . .
Preprocessing and Cleaning the Data . . . . . . .
Use and Creation of Partitions . . . . . . . . . . .
2.6 Building a Model: Example with Linear Regression
Boston Housing Data . . . . . . . . . . . . . . .
Modeling Process . . . . . . . . . . . . . . . . .
2.7 Using Excel for Data Mining . . . . . . . . . . . .
Problems . . . . . . . . . . . . . . . . . . . . . . . .

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Part II DATA EXPLORATION AND

DIMENSION REDUCTION
Chapter

3 Data Visualization

3.1 Uses of Data Visualization . . . . . . . . . . . . . . . . . .

3.2 Data Examples . . . . . . . . . . . . . . . . . . . . . . . .
Example 1: Boston Housing Data . . . . . . . . . . . . . .
Example 2: Ridership on Amtrak Trains . . . . . . . . . . .
3.3 Basic Charts: Bar Charts, Line Graphs, and Scatterplots . .
Distribution Plots: Boxplots and Histograms . . . . . . . .
Heatmaps: Visualizing Correlations and Missing Values . .
3.4 Multidimensional Visualization . . . . . . . . . . . . . . .
Adding Variables: Color, Size, Shape, Multiple Panels, and
Animation . . . . . . . . . . . . . . . . . . . . . . . . .
Manipulations: Rescaling, Aggregation and Hierarchies,
Zooming, and Panning, and Filtering . . . . . . . . . . .
Reference: Trend Lines and Labels . . . . . . . . . . . . .
Scaling up: Large Datasets . . . . . . . . . . . . . . . . .
Multivariate Plot: Parallel Coordinates Plot . . . . . . . . .
Interactive Visualization . . . . . . . . . . . . . . . . . . .
3.5 Specialized Visualizations . . . . . . . . . . . . . . . . . .
Visualizing Networked Data . . . . . . . . . . . . . . . . .
Visualizing Hierarchical Data: Treemaps . . . . . . . . . .
Visualizing Geographical Data: Map Charts . . . . . . . . .
3.6 Summary of Major Visualizations and Operations, According
to Data Mining Goal . . . . . . . . . . . . . . . . . . . . .
Prediction . . . . . . . . . . . . . . . . . . . . . . . . . .
Classification . . . . . . . . . . . . . . . . . . . . . . . . .
Time Series Forecasting . . . . . . . . . . . . . . . . . . .
Unsupervised Learning . . . . . . . . . . . . . . . . . . .
Problems . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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Chapter

4 Dimension Reduction

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4.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . .
4.2 Practical Considerations . . . . . . . . . . . . . . . . . . .
Example 1: House Prices in Boston . . . . . . . . . . . . .
4.3 Data Summaries . . . . . . . . . . . . . . . . . . . . . . .
Summary Statistics . . . . . . . . . . . . . . . . . . . . .
Pivot Tables . . . . . . . . . . . . . . . . . . . . . . . . .
4.4 Correlation Analysis . . . . . . . . . . . . . . . . . . . . .
4.5 Reducing the Number of Categories in Categorical Variables
4.6 Converting a Categorical Variable to a Numerical Variable .
4.7 Principal Components Analysis . . . . . . . . . . . . . . .
Example 2: Breakfast Cereals . . . . . . . . . . . . . . . .
Principal Components . . . . . . . . . . . . . . . . . . . .
Normalizing the Data . . . . . . . . . . . . . . . . . . . .
Using Principal Components for Classification and
Prediction . . . . . . . . . . . . . . . . . . . . . . . . .
4.8 Dimension Reduction Using Regression Models . . . . . .
4.9 Dimension Reduction Using Classification and Regression
Trees . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Problems . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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Part III PERFORMANCE EVALUATION

Chapter 5 Evaluating Classification and

Predictive Performance

5.1 Introduction . . . . . . . . . . . . . . . . . . .
5.2 Judging Classification Performance . . . . . . .
Benchmark: The Naive Rule . . . . . . . . . . .
Class Separation . . . . . . . . . . . . . . . . .
Classification Matrix . . . . . . . . . . . . . . .
Using the Validation Data . . . . . . . . . . . .
Accuracy Measures . . . . . . . . . . . . . . .
Cutoff for Classification . . . . . . . . . . . . .
Performance in Unequal Importance of Classes
Asymmetric Misclassification Costs . . . . . . .
Oversampling and Asymmetric Costs . . . . . .
Classification Using a Triage Strategy . . . . . .
5.3 Evaluating Predictive Performance . . . . . . .
Benchmark: The Average . . . . . . . . . . . .
Prediction Accuracy Measures . . . . . . . . . .
Problems . . . . . . . . . . . . . . . . . . . . . . .

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Part IV PREDICTION AND CLASSIFICATION METHODS

Chapter 6 Multiple Linear Regression

121

6.1 Introduction . . . . . . . . . . . . . . . . . . . . .
6.2 Explanatory versus Predictive Modeling . . . . . .
6.3 Estimating the Regression Equation and Prediction
Example: Predicting the Price of Used Toyota Corolla
Automobiles . . . . . . . . . . . . . . . . . . .
6.4 Variable Selection in Linear Regression . . . . . . .
Reducing the Number of Predictors . . . . . . . . .
How to Reduce the Number of Predictors . . . . . .
Problems . . . . . . . . . . . . . . . . . . . . . . . . .
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7 k-Nearest Neighbors (k-NN)

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7.1 k-NN Classifier (Categorical Outcome) . . . . . . .

Determining Neighbors . . . . . . . . . . . . . .
Classification Rule . . . . . . . . . . . . . . . . .
Example: Riding Mowers . . . . . . . . . . . . . .
Choosing k . . . . . . . . . . . . . . . . . . . . .
Setting the Cutoff Value . . . . . . . . . . . . . .
k-NN with More Than Two Classes . . . . . . . . .
7.2 k-NN for a Numerical Response . . . . . . . . . .
7.3 Advantages and Shortcomings of k-NN Algorithms
Problems . . . . . . . . . . . . . . . . . . . . . . . .
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8 Naive Bayes

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8.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . .
Example 1: Predicting Fraudulent Financial Reporting . . .
8.2 Applying the Full (Exact) Bayesian Classifier . . . . . . . .
Practical Difficulty with the Complete (Exact) Bayes
Procedure . . . . . . . . . . . . . . . . . . . . . . . . .
Solution: Naive Bayes . . . . . . . . . . . . . . . . . . . .
Example 2: Predicting Fraudulent Financial Reports,
Two Predictors . . . . . . . . . . . . . . . . . . . . . .
Example 3: Predicting Delayed Flights . . . . . . . . . . .
8.3 Advantages and Shortcomings of the Naive Bayes Classifier
Problems . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Chapter

9 Classification and Regression Trees

9.1 Introduction . . . . . . .
9.2 Classification Trees . . .
Recursive Partitioning . .
Example 1: Riding Mowers

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9.3 Measures of Impurity . . . . . . . . . . . . . . . .

Tree Structure . . . . . . . . . . . . . . . . . . . .
Classifying a New Observation . . . . . . . . . . .
9.4 Evaluating the Performance of a Classification Tree
Example 2: Acceptance of Personal Loan . . . . . .
9.5 Avoiding Overfitting . . . . . . . . . . . . . . . . .
Stopping Tree Growth: CHAID . . . . . . . . . . . .
Pruning the Tree . . . . . . . . . . . . . . . . . . .
9.6 Classification Rules from Trees . . . . . . . . . . .
9.7 Classification Trees for More Than Two Classes . . .
9.8 Regression Trees . . . . . . . . . . . . . . . . . . .
Prediction . . . . . . . . . . . . . . . . . . . . . .
Measuring Impurity . . . . . . . . . . . . . . . . .
Evaluating Performance . . . . . . . . . . . . . . .
9.9 Advantages, Weaknesses, and Extensions . . . . .
Problems . . . . . . . . . . . . . . . . . . . . . . . . .
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10 Logistic Regression

10.1 Introduction . . . . . . . . . . . . . . . . . . . . . .
10.2 Logistic Regression Model . . . . . . . . . . . . . . .
Example: Acceptance of Personal Loan . . . . . . . .
Model with a Single Predictor . . . . . . . . . . . . .
Estimating the Logistic Model from Data: Computing
Parameter Estimates . . . . . . . . . . . . . . . .
Interpreting Results in Terms of Odds . . . . . . . . .
10.3 Evaluating Classification Performance . . . . . . . .
Variable Selection . . . . . . . . . . . . . . . . . . .
Impact of Single Predictors . . . . . . . . . . . . . .
10.4 Example of Complete Analysis: Predicting Delayed
Flights . . . . . . . . . . . . . . . . . . . . . . . . .
Data Preprocessing . . . . . . . . . . . . . . . . . .
Model Fitting and Estimation . . . . . . . . . . . . .
Model Interpretation . . . . . . . . . . . . . . . . . .
Model Performance . . . . . . . . . . . . . . . . . .
Variable Selection . . . . . . . . . . . . . . . . . . .
10.5 Appendix: Logistic Regression for Profiling . . . . . .
Appendix A: Why Linear Regression Is Inappropriate
for a Categorical Response . . . . . . . . . . . . .
Appendix B: Evaluating Goodness of Fit . . . . . . .
Appendix C: Logistic Regression for More Than
Two Classes . . . . . . . . . . . . . . . . . . . . .
Problems . . . . . . . . . . . . . . . . . . . . . . . . . .

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Chapter

11 Neural Nets

11.1 Introduction . . . . . . . . . . . . . . . . . . . .
11.2 Concept and Structure of a Neural Network . . . .
11.3 Fitting a Network to Data . . . . . . . . . . . . .
Example 1: Tiny Dataset . . . . . . . . . . . . . .
Computing Output of Nodes . . . . . . . . . . . .
Preprocessing the Data . . . . . . . . . . . . . .
Training the Model . . . . . . . . . . . . . . . . .
Example 2: Classifying Accident Severity . . . . .
Avoiding Overfitting . . . . . . . . . . . . . . . .
Using the Output for Prediction and Classification
11.4 Required User Input . . . . . . . . . . . . . . . .
11.5 Exploring the Relationship Between Predictors
and Response . . . . . . . . . . . . . . . . . . .
11.6 Advantages and Weaknesses of Neural Networks
Problems . . . . . . . . . . . . . . . . . . . . . . . .
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12 Discriminant Analysis

12.1 Introduction . . . . . . . . . . . . . . . . . . . . .
Example 1: Riding Mowers . . . . . . . . . . . . . .
Example 2: Personal Loan Acceptance . . . . . . .
12.2 Distance of an Observation from a Class . . . . . .
12.3 Fishers Linear Classification Functions . . . . . . .
12.4 Classification Performance of Discriminant Analysis
12.5 Prior Probabilities . . . . . . . . . . . . . . . . . .
12.6 Unequal Misclassification Costs . . . . . . . . . . .
12.7 Classifying More Than Two Classes . . . . . . . . .
Example 3: Medical Dispatch to Accident Scenes . .
12.8 Advantages and Weaknesses . . . . . . . . . . . .
Problems . . . . . . . . . . . . . . . . . . . . . . . . .

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Part V MINING RELATIONSHIPS

AMONG RECORDS
Chapter 13 Association Rules
13.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . .
13.2 Discovering Association Rules in Transaction Databases . .
Example 1: Synthetic Data on Purchases of Phone Faceplates
13.3 Generating Candidate Rules . . . . . . . . . . . . . . . . .
The Apriori Algorithm . . . . . . . . . . . . . . . . . . . .
13.4 Selecting Strong Rules . . . . . . . . . . . . . . . . . . . .
Support and Confidence . . . . . . . . . . . . . . . . . . .

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Lift Ratio . . . . . . . . . . . . . . . . . . .
Data Format . . . . . . . . . . . . . . . . .
Process of Rule Selection . . . . . . . . . .
Interpreting the Results . . . . . . . . . . .
Statistical Significance of Rules . . . . . . .
Example 2: Rules for Similar Book Purchases
13.5 Summary . . . . . . . . . . . . . . . . . . .
Problems . . . . . . . . . . . . . . . . . . . . .
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14 Cluster Analysis

279

14.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . .
Example: Public Utilities . . . . . . . . . . . . . . . . . .
14.2 Measuring Distance Between Two Records . . . . . . . .
Euclidean Distance . . . . . . . . . . . . . . . . . . . .
Normalizing Numerical Measurements . . . . . . . . . .
Other Distance Measures for Numerical Data . . . . . . .
Distance Measures for Categorical Data . . . . . . . . . .
Distance Measures for Mixed Data . . . . . . . . . . . .
14.3 Measuring Distance Between Two Clusters . . . . . . . .
14.4 Hierarchical (Agglomerative) Clustering . . . . . . . . . .
Minimum Distance (Single Linkage) . . . . . . . . . . . .
Maximum Distance (Complete Linkage) . . . . . . . . . .
Average Distance (Average Linkage) . . . . . . . . . . .
Centroid Distance (Average Group Linkage) . . . . . . . .
Wards Method . . . . . . . . . . . . . . . . . . . . . . .
Dendrograms: Displaying Clustering Process and Results
Validating Clusters . . . . . . . . . . . . . . . . . . . . .
Limitations of Hierarchical Clustering . . . . . . . . . . .
14.5 Nonhierarchical Clustering: The k-Means Algorithm . . .
Initial Partition into k Clusters . . . . . . . . . . . . . . .
Problems . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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Part VI FORECASTING TIME SERIES

Chapter 15 Handling Time Series
15.1 Introduction . . . . . . . . . . . . . . . .
15.2 Explanatory versus Predictive Modeling .
15.3 Popular Forecasting Methods in Business
Combining Methods . . . . . . . . . . . .
15.4 Time Series Components . . . . . . . . .
Example: Ridership on Amtrak Trains . . .
15.5 Data Partitioning . . . . . . . . . . . . . .
Problems . . . . . . . . . . . . . . . . . . . .

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CONTENTS

Chapter

16 Regression-Based Forecasting

317

16.1 Model with Trend . . . . . . . . . . . . . . . . . .

Linear Trend . . . . . . . . . . . . . . . . . . . . .
Exponential Trend . . . . . . . . . . . . . . . . . .
Polynomial Trend . . . . . . . . . . . . . . . . . .
16.2 Model with Seasonality . . . . . . . . . . . . . . .
16.3 Model with Trend and Seasonality . . . . . . . . .
16.4 Autocorrelation and ARIMA Models . . . . . . . . .
Computing Autocorrelation . . . . . . . . . . . . .
Improving Forecasts by Integrating Autocorrelation
Information . . . . . . . . . . . . . . . . . . . .
Evaluating Predictability . . . . . . . . . . . . . . .
Problems . . . . . . . . . . . . . . . . . . . . . . . . .
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17 Smoothing Methods

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17.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . .
17.2 Moving Average . . . . . . . . . . . . . . . . . . . . . . .
Centered Moving Average for Visualization . . . . . . . . .
Trailing Moving Average for Forecasting . . . . . . . . . . .
Choosing Window Width (w) . . . . . . . . . . . . . . . . .
17.3 Simple Exponential Smoothing . . . . . . . . . . . . . . .
Choosing Smoothing Parameter . . . . . . . . . . . . . .
Relation between Moving Average and Simple Exponential
Smoothing . . . . . . . . . . . . . . . . . . . . . . . .
17.4 Advanced Exponential Smoothing . . . . . . . . . . . . .
Series with a Trend . . . . . . . . . . . . . . . . . . . . . .
Series with a Trend and Seasonality . . . . . . . . . . . .
Series with Seasonality (No Trend) . . . . . . . . . . . . .
Problems . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Part VII CASES

Chapter 18 Cases
18.1 Charles Book Club . . . . . . .
The Book Industry . . . . . . .
Database Marketing at Charles
Data Mining Techniques . . . .
Assignment . . . . . . . . . .
18.2 German Credit . . . . . . . . .
Assignment . . . . . . . . . .
18.3 Tayko Software Cataloger . . .

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CONTENTS

Background . . . . . . . . . . . . . . . . . . . . .
The Mailing Experiment . . . . . . . . . . . . . . .
Data . . . . . . . . . . . . . . . . . . . . . . . . .
Assignment . . . . . . . . . . . . . . . . . . . . .
18.4 Segmenting Consumers of Bath Soap . . . . . . . .
Business Situation . . . . . . . . . . . . . . . . . .
Key Problems . . . . . . . . . . . . . . . . . . . . .
Data . . . . . . . . . . . . . . . . . . . . . . . . .
Measuring Brand Loyalty . . . . . . . . . . . . . .
Assignment . . . . . . . . . . . . . . . . . . . . .
Appendix . . . . . . . . . . . . . . . . . . . . . . .
18.5 Direct-Mail Fundraising . . . . . . . . . . . . . . .
Background . . . . . . . . . . . . . . . . . . . . .
Data . . . . . . . . . . . . . . . . . . . . . . . . .
Assignment . . . . . . . . . . . . . . . . . . . . .
18.6 Catalog Cross Selling . . . . . . . . . . . . . . . .
Background . . . . . . . . . . . . . . . . . . . . .
Assignment . . . . . . . . . . . . . . . . . . . . .
18.7 Predicting Bankruptcy . . . . . . . . . . . . . . . .
Predicting Corporate Bankruptcy . . . . . . . . . .
Assignment . . . . . . . . . . . . . . . . . . . . .
18.8 Time Series Case: Forecasting Public Transportation
Demand . . . . . . . . . . . . . . . . . . . . . . .
Background . . . . . . . . . . . . . . . . . . . . .
Problem Description . . . . . . . . . . . . . . . . .
Available Data . . . . . . . . . . . . . . . . . . . .
Assignment Goal . . . . . . . . . . . . . . . . . . .
Assignment . . . . . . . . . . . . . . . . . . . . .
Tips and Suggested Steps . . . . . . . . . . . . . .

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References

397

Index

399

xv