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Business Intelligence for Decision Support

CHAPTER 5
DATA MINING

Learning Objectives

▪ Define data mining as an enabling technology for business intelligence.

▪ Understand the objectives and benefits of business analytics and data mining.
▪ Recognize the wide range of applications of data mining.
▪ Learn the standardized data mining processes.
▪ CRISP-OM
▪ SEMMA
▪ KDD
▪ Understand the steps involved in data preprocessing for data mining.
▪ Learn different methods and algorithms of data mining.
▪ Build awareness of the existing data mining software tools.
▪ Commercial versus free/open source.
▪ Understand the pitfalls and myths of data mining.

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Opening Vignette...

▪ Cabela’s Reels in More Customers with Advanced Analytics and Data

Mining.
▪ Decision situation
▪ Problem
▪ Proposed solution
▪ Results
▪ Answer & discuss the case questions.

Questions for the Opening Vignette

1. Why should retailers, especially omni-channel retailers, pay extra attention to advanced
analytics and data mining?

2. What are the top challenges for multi-channel retailers? Can you think of other industry
segments that face similar problems/challenges?

3. What are the sources of data that retailers such as Cabela’s use for their data mining
projects?

4. What does it mean to have a "single view of the customer"? How can it be
accomplished?

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Data Mining Concepts/Definitions Why Data Mining?

▪ Following are some of most pronounced reasons:

▪ More intense competition at the global scale.
▪ Recognition of the value in data sources.
▪ Availability of quality data on customers, vendors, transactions, Web, etc.
▪ Consolidation and integration of data repositories into data warehouses.
▪ The exponential increase in data processing and storage capabilities; and decrease in
cost.
▪ Movement toward conversion of information resources into nonphysical form.

Definition of Data Mining

▪ Data Mining: is a term used to describe discovering or “mining” knowledge from large
amounts of data.

▪ Data Mining: The nontrivial process of identifying valid, novel, potentially useful, and
ultimately understandable patterns in data stored in structured databases. - Fayyad et al.,
(1996) in records structured by categorical, ordinal, and continuous variables (Fayyad et
al., 1996).

▪ Next slide

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Definition of Data Mining

▪ This definition, the meanings of the key terms are as follows:

▪ Process: implies that data mining comprises many iterative steps.
▪ Nontrivial: means that some experimentation-type search or inference is involved;
that is, it is not as straightforward as a computation of predefined quantities.
▪ Valid: means that the discovered patterns should hold true on new data with
sufficient degree of certainty.

Definition of Data Mining

▪ This definition, the meanings of the key terms are as follows:

▪ Novel means that the patterns are not previously known to the user within the
context of the system being analyzed.

▪ Potentially useful means that the discovered patterns should lead to some benefit to
the user or task.

▪ Ultimately understandable means that the pattern should make business sense that
leads to the user saying “mmm! It makes sense; why didn’t I think of that” if not
immediately, at least after some post processing.

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Data Mining is at the Intersection of Many Disciplines

❖ The following are the major characteristics

and objectives of data mining:
➢ Data are often buried deep within very large databases,
which sometimes contain data from several years. In
many cases, the data are cleansed and consolidated
into a data warehouse. Data may be presented in a
variety of formats (see Technology Insights 5.1 for a
brief taxonomy of data).

Data Mining Characteristics/Objectives

■ Source of data for DM is often a consolidated data warehouse (not always!).

■ DM environment is usually a client-server or a Web-based information systems
architecture.
■ Data is the most critical ingredient for DM which may include soft/unstructured data.
■ The miner is often an end user.
■ Striking it rich requires creative thinking.
■ Data mining tools' capabilities and ease of use are essential (Web, Parallel processing,
etc.).

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Data in Data Mining

■ Data: a collection of facts usually obtained as the result of experiences, observations,
or experiments.
■ Data may consist of numbers, words, images, ...
■ Data: lowest level of abstraction (from which information and knowledge are
derived).

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What Does DM Do? How Does it Work?

■ DM extracts patterns from data

■ Pattern? A mathematical (numeric and/or symbolic) relationship among data items.

■ Data mining seeks to identify four major types of patterns:

■ Associations.
■ Prediction.
■ Cluster (segmentation).
■ Sequential (or time series) relationships.

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A Taxonomy for Data Mining Tasks

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Data Mining Tasks

■ Time-series forecasting:
■ Part of sequence or link analysis?

■ Visualization:
■ Another datamining task?

■ Types of DM:
■ Hypothesis-driven data mining.
■ Discovery-driven data mining.

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Data Mining Applications

■ Customer Relationship Management:

■ Maximize return on marketing campaigns.
■ Improve customer retention (churn analysis).
■ Maximize customer value (cross-, up-selling).
■ Identify and treat most valued customers.

■ Banking & Other Financial:

■ Automate the loan application process.
■ Detecting fraudulent transactions.
■ Maximize customer value (cross-, up-selling).
■ Optimizing cash reserves with forecasting.

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Data Mining Applications

■ Retailing and Logistics:
■ Optimize inventory levels at different locations.
■ Improve the store layout and sales promotions.
■ Optimize logistics by predicting seasonal effects.
■ Minimize losses due to limited shelf life.

■ Manufacturing and Maintenance:

■ Predict/prevent machinery failures.
■ Identify anomalies in production systems to optimize the use manufacturing
capacity.
■ Discover novel patterns to improve product quality.

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Data Mining Applications

■ Brokerage and Securities Trading:

■ Predict changes on certain bond prices.
■ Forecast the direction of stock fluctuations.
■ Assess the effect of events on market movements.
■ Identify and prevent fraudulent activities in trading.

■ Insurance:
■ Forecast claim costs for better business planning.
■ Determine optimal rate plans.
■ Optimize marketing to specific customers.
■ Identify and prevent fraudulent claim activities.

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Data Mining Applications

■ Computer hardware and software.

■ Predict disk drive failures well before they actually occur;
■ Identify and filter unwanted Web content and e-mail messages;
■ Detect and prevent computer network security bridges;
■ Identify potentially unsecure software products.

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Data Mining Applications

■ Travel industry (airlines, hotels/resorts, rental car companies).

■ Predict sales of different services (seat types in airplanes, room types in
hotels/resorts, car types in rental car companies) in order to optimally price
services to maximize revenues as a function of time-varying transactions
(commonly referred to as yield management);
■ Forecast demand at different locations to better allocate limited organizational
resources;
■ Identify the most profitable customers and provide them with personalized
services to maintain their repeat business.
■ Retain valuable employees by identifying and acting on the root causes for
attrition.

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Data Mining Applications

■ Healthcare.
■ Identify people without health insurance and the factors underlying this undesired
phenomenon;
■ identify novel cost–benefit relationships between different treatments to develop
more effective strategies;
■ forecast the level and the time of demand at different service locations to optimally
allocate organizational resources;
■ understand the underlying reasons for customer and employee attrition.

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Data Mining Applications

■ Medicine.
■ Identify novel patterns to improve survivability of patients with cancer;
■ predict success rates of organ transplantation patients to develop better donor-
organ matching policies;
■ identify the functions of different genes in the human chromosome (known as
genomics);
■ Discover the relationships between symptoms and illnesses (as well as illnesses
and successful treatments) to help medical professionals make informed and
correct decisions in a timely manner.

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Data Mining Applications

■ Entertainment industry.
■ Analyze viewer data to decide what programs to show during prime time and how to
maximize returns by knowing where to insert advertisements;
■ Predict the financial success of movies before they are produced to make investment
decisions and to optimize the returns;
■ Forecast the demand at different locations and different times to better schedule
entertainment events and to optimally allocate resources;
■ Develop optimal pricing policies to maximize revenues.

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Data Mining Applications

■ Homeland security and law enforcement.

■ Identify patterns of terrorist behaviors.
■ Discover crime patterns (e.g., locations, timings, criminal behaviors, and other
related attributes) to help solve criminal cases in a timely manner;
■ Predict and eliminate potential biological and chemical attacks to the nation’s
critical infrastructure by analyzing special-purpose sensory data;
■ identify and stop malicious attacks on critical information infrastructures (often
called information warfare).

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Data Mining Process

■ A manifestation of best practices

■ Asystematic way to conduct DM projects
■ Different groups have different versions
■ Most common standard processes:
■ CRISP-DM (Cross-Industry Standard Process for Data Mining).
■ SEMMA (Sample, Explore, Modify, Model, and Assess)
■ KDD (Knowledge Discovery in Databases).

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Data Mining Process: CRISP-DM

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Data Mining Process: CRISP-DM

▪ Step 1: Business Understanding

▪ Step 2: Data Understanding
▪ Step 3: Data Preparation (!)
▪ Step 4: Model Building
▪ Step 5: Testing and Evaluation
▪ Step 6: Deployment

The process is highly repetitive and experimental (DM: art versus science?)

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Data Preparation - A Critical DM Task

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Data Mining Process: SEMMA

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Assessment Methods for Classification

■ Most frequently used DM method.

■ Part of the machine-learning family.
■ Employ supervised learning.
■ Learn from past data, classify new data.
■ The output variable is categorical (nominal or ordinal) in nature
■ Classification versus regression?
■ Classification versus clustering?s

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Assessment Methods for Classification

■ Predictive accuracy.
■ Hit rate.
■ Speed.
■ Model building; predicting.
■ Robustness.
■ Scalability.
■ Interpret ability.
■ Transparency, explain ability.

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Accuracy of Classification Models

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Common Accuracy Metrics for Classification Models

True Positive Rate = TP The ratio of correctly classified positives divided by the total positive count (i.e., hit rate or
TP + FN recall)
True Negative Rate = TN The ratio of correctly classified negatives divided by the total negative count (i.e., false
TN + FP alarm rate)
Accuracy = TP + TN The ratio of correctly classified instances (positives and negatives) divided by the total
TP + TN + FP + FN number of instances
Precision = TP The ratio of correctly classified positives divided by the sum of correctly classified
TP + FP positives and incorrectly classified positives
Recall = TP Ratio of correctly classified positives divided by the sum of correctly classified positives
TP + FN and incorrectly classified negatives

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Estimation Methodologies for Classification

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Estimation Methodologies for Classification

■ k-Fold Cross Validation (rotation estimation)

■ Split the data into k mutually exclusive subsets
■ Use each subset as testing while using the rest of the subsets as training
■ Repeat the experimentationfor ktimes
■ Aggregate the test results for true estimation of prediction accuracy training
■ Other estimation methodologies
■ Leave-one-ou, tbootstrapping, jackknifing
■ Area under the ROC curve

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Estimation Methodologies for Classification - ROC Curve

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Classification Techniques

▪ Decision tree analysis

▪ Statistical analysis
▪ Neural networks
▪ Support vector machines
▪ Case-based reasoning
▪ Bayesian classifiers
▪ Genetic algorithms
▪ Rough sets

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Decision Trees

• Employs the divide and conquer method.

• Recursively divides a training set until each division consists of examples
from one class.
1. Create a root node and assign all of the training data to it.
2. Select the best splitting attribute.
A general 3. Add a branch to the root node for each value of the split. Split the data into mutually
algorithm for exclusive subsets along the lines of the specific split.
decision tree
building 4. Repeat steps 2 and 3 for each and every leaf node until the stopping criteria is reached.

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Decision Trees

■ DT algorithms mainly differ on.

1. Splitting criteria.
■ Which variable, what value, etc.
2. Stopping criteria
■ When to stop building the tree.
3. Pruning (generalization method).
■ Pre-pruning versus post-pruning.
■ Most popular DT algorithms include.
■ ID3, C4.S, CS; CART; CHAID; MS

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Decision Trees

■ Alternative splitting criteria:

■ Gini index determines the purity of a specific class as a result of a decision to
branch along a particular attribute/value.
■ Used in CART.
■ Information gain uses entropy to measure the extent of uncertainty or
randomness of a particular attribute/value split.
■ Used in 1D3, C4.5, CS
■ Chi-square statistics (used in CHAID).

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Cluster Analysis for Data Mining

■ Used for automatic identification of natural groupings of things.

■ Part of the machine-learning family.
■ Employs unsupervised learning.
■ Learns the clusters of things from past data, then assigns new instances.
■ There is not an output variable.
■ Also known as segmentation.

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Cluster Analysis for Data Mining

■ Clustering results may be used to:

■ Identify natural groupings of customers.
■ Identify rules for assigning new cases to classes for targeting/diagnostic
purposes.
■ Provide characterization, definition, labeling of populations.
■ Find typical cases to label and represent classes.
■ Decrease the size and complexity of problems for other data mining
methods.
■ Identify outliers in a specific domain (e.g., rare-event detection).

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Cluster Analysis for Data Mining

▪ Analysis methods:
▪ Statistical methods (including both hierarchical and nonhierarchical), such as k
means, k-modes, and so on
▪ Neural networks (adaptive resonance theory [ART], self-organizing map
[SOM])
▪ Fuzzy logic (e.g., fuzzy c-means algorithm)
▪ Genetic algorithms

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Cluster Analysis for Data Mining

▪ How many clusters?

▪ There is not a "truly optimal" way to calculate it.
▪ Heuristics are often used.

▪ Most cluster analysis methods involve the use of a distance measure to

calculate the closeness between pairs of items.
▪ Euclidian versus Manhattan/Rectilinear distance.

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Cluster Analysis for Data Mining

• k-Means Clustering Algorithm
■ k : pre-determined number of clusters
■ Algorithm (Step O: determine value of k)
■ Step 1: Randomly generate k random points as initial cluster centers.
■ Step 2: Assign each point to the nearest cluster center.
■ Step 3: Re-compute the new cluster centers.
■ Repetition step: Repeat steps 3 and 4 until some convergence criterion is
met (usually that the assignment of points to clusters becomes stable).

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Cluster Analysis for Data Mining -k-Means Clustering Algorithm

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Association Rule Mining

• A very popular DM method in business.

• Finds interesting relationships (affinities) between variables (items or
events).
• Part of machine learning family.
• Employs unsupervised learning.
• There is no output variable.
• Also known as market basket analysis.

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Association Rule Mining

▪ Input: the simple point-of-sale transaction data.

▪ Output: Most frequent affinities among items.

▪ Example: according to the transaction data..."Customer who bought a lap-

top computer and a virus protection software, also bought extended service
plan 70 percent of the time.“

▪ How do you use such a pattern/knowledge?

▪ Put the items next to each other.
▪ Promote the items as a package.
▪ Place items far apart from each other!

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Association Rule Mining

■ A representative application of association rule mining includes:
■ In business: cross-marketing, cross-selling, store design, catalog design, e-
commerce site design, optimization of online advertising, product pricing,
and sales/promotion configuration.
■ In medicine: relationships between symptoms and illnesses; diagnosis and
patient characteristics and treatments (to be used in medical DSS); and genes
and their functions (to be used in genomics projects).

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Association Rule Mining

■ Are all association rules interesting and useful?

A Generic Rule: X Y [ S%, C%]
■ X, Y: products and/or services
■ X: Left-hand-side (LHS)
■ Y: Right-hand-side (RHS)
■ S: Support: how often X and Y go together
■ C: Confidence: how often Y goes together with X
■ Exampl: {Laptop Computer, Antivirus Software} {Extended
Service Plan} [30%, 70%]

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Association Rule Mining

■ Algorithms are available for generating association rules

■ Apriori
■ Eclat
■ FP-Growth
■ + Derivatives and hybrids of the three
■ The algorithms help identify the frequent item sets, which are
then converted to association rules

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Association Rule Mining

➢ Apriori Algorithm
■ Finds subsets that are common to at least a minimum number of the itemsets.
■ Uses a bottom-up approach.
■ frequent subsets are extended one item at a time (the size of frequent subsets
increases from one item subsets to two-item subsets, then three-item subsets,
and so on),
■ Groups of candidates at each level are tested against the data for
minimum support.

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Association Rule Mining Apriori Algorithm

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Data Mining Software

▪ Commercial
▪ IBM SPSS Modeler (formerly Clementine)
▪ SAS - Enterprise Miner
▪ IBM - Intelligent Miner
▪ StatSoft -Statistica Data Miner many more
▪ Free and/or Open Source
▪ R
▪ RapidMiner
▪ Weka...

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Data Mining Myths

▪ Data Mining
■ Provides instant solutions/predictions
■ Is not yet viable for business applications
■ Requires a separate, dedicated database
■ Can only be done by those with advanced degrees
■ Is only for large firms that have lots of customer data
■ Is another name for the good-old statistics

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Common Data Mining Blunders

1. Selecting the wrong problem for data mining.

2. Ignoring what your sponsor thinks data mining is and what it really can and cannot do.
3. Leaving insufficient time for data preparation. It takes more effort than is generally
understood.
4. Looking only at aggregated results and not at individual records. IBM’s DB2 IMS can
highlight individual records of interest.
5. Being sloppy about keeping track of the data mining procedure and results.
6.

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Common Data Mining Blunders … Cont

6. Ignoring suspicious findings and quickly moving on.

7. Running mining algorithms repeatedly and blindly. It is important
to think hard about the next stage of data analysis. Data mining is
a very hands-on activity.
8. Believing everything you are told about the data.
9. Believing everything you are told about your own data mining
analysis.
10. Measuring your results differently from the way your sponsor
measures them.

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Business Intelligence for Decision Support

Thank you For

listening

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