Business Intelligence and Analytics:

Systems for Decision Support

Global Edition
(10th Edition)

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-DM
◼ SEMMA
◼ KDD
(Continued…)
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 Learning Objectives
◼ 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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 Data Mining Concepts/Definitions
Why Data Mining?
◼ 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.
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 Definition of 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)
◼ Keywords in this definition: Process, nontrivial,
valid, novel, potentially useful, understandable.
◼ Data mining: a misnomer?
◼ Other names: knowledge extraction, pattern
analysis, knowledge discovery, information
harvesting, pattern searching, data dredging,…
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 Data Mining is at the Intersection
of Many Disciplines

Ar
tifi
Pattern

c
ial
Recognition

s
tic

Int
tis

ellig
Sta

en
ce
DATA Machine
MINING Learning

Mathematical
Modeling Databases

Management Science &

Information Systems

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 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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 Application Case 5.1
Smarter Insurance: Infinity P&C Improves
Customer Service and Combats Fraud with
Predictive Analytics
Questions for Discussion
1. How did Infinity P&C improve customer service
with data mining?
2. What were the challenges, the proposed solution,
and the obtained results?
3. What was their implementation strategy? Why is it
important to produce results as early as possible
in data mining studies?
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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).
Data

Unstructured or
Structured
Semi-Structured

Categorical Numerical Textual Multimedia HTML/XML

Nominal Ordinal Interval Ratio

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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

◼ Types of patterns
◼ Association
◼ Prediction
◼ Cluster (segmentation)
◼ Sequential (or time series) relationships
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 Application Case 5.2
Harnessing Analytics to Combat Crime:
Predictive Analytics Helps Memphis
Police Department Pinpoint Crime and
Focus Police Resources
Questions for Discussion
1. How did the Memphis Police Department use
data mining to better combat crime?
2. What were the challenges, the proposed
solution, and the obtained results?
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 A Taxonomy for
Data Mining Tasks
Data Mining Learning Method Popular Algorithms

Classification and Regression Trees,

Prediction Supervised
ANN, SVM, Genetic Algorithms

Decision trees, ANN/MLP, SVM, Rough

Classification Supervised
sets, Genetic Algorithms

Linear/Nonlinear Regression, Regression

Regression Supervised
trees, ANN/MLP, SVM

Association Unsupervised Apriory, OneR, ZeroR, Eclat

Link analysis Unsupervised Expectation Maximization, Apriory

Algorithm, Graph-based Matching

Sequence analysis Unsupervised Apriory Algorithm, FP-Growth technique

Clustering Unsupervised K-means, ANN/SOM

Outlier analysis Unsupervised K-means, Expectation Maximization (EM)

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 Data Mining Tasks
◼ Time-series forecasting
◼ Part of sequence or link analysis?
◼ Visualization
◼ Another data mining 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
◼ Science and engineering
◼ Government and defense
◼ Homeland security and law enforcement
◼ Travel industry
◼ Healthcare Increasingly more
popular application areas
◼ Medicine for data mining
◼ Entertainment industry
◼ Sports
◼ Etc.
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 Data Mining Process
◼ A manifestation of best practices
◼ A systematic 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

Source: KDNuggets.com
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 Data Mining Process: CRISP-DM

1 2
Business Data
Understanding Understanding

3
Data
Preparation
Data Sources
6
4
Deployment
Model
Building

5
Testing and
Evaluation

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 Data Mining Process: CRISP-DM
Step 1: Business Understanding Accounts for
~85% of total
Step 2: Data Understanding project time
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
Real-world
Data

· Collect data
Data Consolidation · Select data
· Integrate data

· Impute missing values

Data Cleaning · Reduce noise in data
· Eliminate inconsistencies

· Normalize data
Data Transformation · Discretize/aggregate data
· Construct new attributes

· Reduce number of variables

Data Reduction · Reduce number of cases
· Balance skewed data

Well-formed
Data

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 Data Mining Process: SEMMA
Sample
(Generate a representative
sample of the data)

Assess Explore
(Evaluate the accuracy and (Visualization and basic
usefulness of the models) description of the data)

SEMMA

Model Modify
(Use variety of statistical and (Select variables, transform
machine learning models ) variable representations)

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 Data Mining Methods:
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?
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 Assessment Methods for
Classification
◼ Predictive accuracy
◼ Hit rate
◼ Speed
◼ Model building; predicting
◼ Robustness
◼ Scalability
◼ Interpretability
◼ Transparency, explainability
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 Accuracy of Classification Models
◼ In classification problems, the primary source for
accuracy estimation is the confusion matrix
True Class TP + TN
Positive Negative Accuracy =
TP + TN + FP + FN
Positive

True False TP
True Positive Rate =
Predicted Class

Positive Positive
TP + FN
Count (TP) Count (FP)
TN
True Negative Rate =
TN + FP
Negative

False True
Negative Negative
Count (FN) Count (TN) TP TP
P recision = Recall =
TP + FP TP + FN

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 Estimation Methodologies for
Classification
◼ Simple split (or holdout or test sample
estimation)
◼ Split the data into 2 mutually exclusive sets training
(~70%) and testing (30%)
Model
Training Data Development
2/3

Preprocessed Classifier
Data
1/3 Model
Prediction
Assessment
Testing Data Accuracy
(scoring)

◼ For ANN, the data is split into three sub-sets (training

[~60%], validation [~20%], testing [~20%])
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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 experimentation for k times
◼ Aggregate the test results for true estimation of
prediction accuracy training
◼ Other estimation methodologies
◼ Leave-one-out, bootstrapping, jackknifing
◼ Area under the ROC curve

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 K-fold CV

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 Estimation Methodologies for
Classification – ROC Curve
1

0.9

0.8
A
True Positive Rate (Sensitivity)

0.7

B
0.6

C
0.5

0.4

0.3

0.2

0.1

0
0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1

False Positive Rate (1 - Specificity)

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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
A general
data to it.
algorithm
for 2. Select the best splitting attribute.
decision 3. Add a branch to the root node for each value of
tree the split. Split the data into mutually exclusive
building subsets along the lines of the specific split.
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, C4.5, C5; CART; CHAID; M5
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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 ID3, C4.5, C5
◼ Chi-square statistics
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 Information Gain (IG)
◼ Using a decision algorithm, we start at the
tree root and split the data on the feature
that results in the largest information
gain (IG).
◼ We repeat this splitting procedure at each
child node down to the empty leaves. This
means that the samples at each node all
belong to the same class.

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 ◼ However, this can result in a very deep tree with many
nodes, which can easily lead to overfitting. Thus, we
typically want to prune the tree by setting a limit for
the maximum depth of the tree.
◼ Basically, using IG, we want to determine which
attribute in a given set of training feature vectors is
most useful. In other words, IG tells us how important
a given attribute of the feature vectors is.
◼ We will use it to decide the ordering of attributes in
the nodes of a decision tree.

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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
◼ 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 0: 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 2 and 3 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

Step 1 Step 2 Step 3

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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
◼ Often used as an example to describe DM to
ordinary people, such as the famous
“relationship between diapers and beers!”
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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

Example: {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), and
◼ groups of candidates at each level are tested
against the data for minimum support.
(see the figure) → --

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 Association Rule Mining
Apriori Algorithm

Raw Transaction Data One-item Itemsets Two-item Itemsets Three-item Itemsets

Transaction SKUs Itemset Itemset Itemset

Support Support Support
No (Item No) (SKUs) (SKUs) (SKUs)

1 1, 2, 3, 4 1 3 1, 2 3 1, 2, 4 3
1 2, 3, 4 2 6 1, 3 2 2, 3, 4 3
1 2, 3 3 4 1, 4 3
1 1, 2, 4 4 5 2, 3 4
1 1, 2, 3, 4 2, 4 5
1 2, 4 3, 4 3

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 Data Mining
R (245)
Excel (238)
Rapid-I RapidMiner (213)
KNIME (174)

Software
Weka / Pentaho (118)
StatSoft Statistica (112)
SAS (101)
Rapid-I RapidAnalytics (83)
MATLAB (80)
IBM SPSS Statistics (62)
IBM SPSS Modeler (54)

Commercial
SAS Enterprise Miner (46)
◼ Orange (42)
Microsoft SQL Server (40)

◼ IBM SPSS Modeler Other free software (39)

TIBCO Spotfire / S+ / Miner (37)

(formerly Clementine)
Tableau (35)
Oracle Data Miner (35)
Other commercial software (32)

◼ SAS - Enterprise Miner JMP (32)

Mathematica (23)

IBM - Intelligent Miner

Miner3D (19)
◼ IBM Cognos (16)
Stata (15)

◼ StatSoft – Statistica Data Zementis (14)

KXEN (14)

Miner Bayesia (14)

C4.5/C5.0/See5 (13)

… many more
Revolution Computing (11)
◼ Salford SPM/CART/MARS/TreeNet/RF (9)
XLSTAT (7)

◼ Free and/or Open Source SAP (BusinessObjects/Sybase/Hana)(7)

Angoss (7)
RapidInsight/Veera (5)

◼ R Teradata Miner (4)

11 Ants Analytics (4)

RapidMiner
WordStat (3)
◼ Predixion Software (3)

Weka…
0 50 100 150 200 250 300
◼

Source: KDNuggets.com

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 Big Data Software Tools
and Platforms
Apache Hadoop/Hbase/Pig/Hive (67)

Amazon Web Services (AWS) (36)

NoSQL databases (33)

Other Big Data software (21)

Other Hadoop-based tools (10) R (245)

0 10 20 30 40 SQL
50(185)
60 70 80
Java (138)
Python (119)
C/C++ (66)
Other languages (57)
Perl (37)
Awk/Gawk/Shell (31)
F# (5)

0 50 100 150 200 250 300

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 Application Case 5.6
Data Mining Goes to Hollywood:
Predicting Financial Success of Movies
Questions for Discussion
◼ Decision situation
◼ Problem
◼ Proposed solution
◼ Results
◼ Answer & discuss the case questions.
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 A tableau sample of features

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 A tableau sample of features

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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/cannot do
3. Not leaving sufficient time for data acquisition,
selection, and preparation
4. Looking only at aggregated results and not at
individual records/predictions
5. Being sloppy about keeping track of the data
mining procedure and results
6. …more in the book
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 End of the Chapter

◼ Questions, comments

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