Data Analytics Made Accessible

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Data Analytics Made Accessible
Copyright © 2015 by Anil K. Maheshwari, Ph.D.
By purchasing this book, you agree not to copy the book by any means,
mechanical or electronic.
No part of this book may be copied or transmitted without written permission.
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Preface
There are many good books in the market on Data Analytics. So, why should
anyone write another book on this topic? I have been teaching courses in
business intelligence and data mining for a few years. More recently, I have
been teaching this course to combined classes of MBA and Computer Science
students. Existing textbooks seem too long, too technical, and too complex for
use by students. This book fills a need for an accessible book on this topic.
My goal was to write a conversational book that feels easy and informative.
This is an accessible book that covers everything important, with concrete
examples, and invites the reader to join this field.
The book has developed from my own class notes. It reflects my decades of
IT industry experience, as well as many years of academic teaching
experience. The chapters are organized for a typical one-semester graduate
course. The book contains caselets from real-world stories at the beginning of
every chapter. There is a running case study across the chapters as exercises.
Many thanks are in order. My father Mr. Ratan Lal Maheshwari encouraged
me to put my thoughts in writing, and make a book out of it. My wife Neerja
helped me find the time and motivation to write this book. My brother Dr.
Sunil Maheshwari was the sources of many encouraging conversations about
it. My colleague Dr. Edi Shivaji provided advice during my teaching the Data
Analytics courses. Another colleague Dr. Scott Herriott served as a role model
as an author of many textbooks. Yet another colleague, Dr. Greg Guthrie
provided many ideas and ways to disseminate the book. Our department
assistant Ms. Karen Slowick at MUM proof-read the first draft of this book.
Ms. Adri-Mari Vilonel in South Africa helped create an opportunity to use
this book for the first time at a corporate MBA program.
Thanks are also due to to my many students at MUM and elsewhere who
proved good partners in my learning more about this area. Finally, thanks to
Maharishi Mahesh Yogi for providing a wonderful university, MUM, where
students develop their intellect as well as their consciousness.
Dr. Anil K. Maheshwari

Fairfield, IA.
November 2015
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Contents

Preface
Chapter 1: Wholeness of Data Analytics
Business Intelligence
Caselet: MoneyBall - Data Mining in Sports
Pattern Recognition
Data Processing Chain
Data
Database
Data Warehouse
Data Mining
Data Visualization
Organization of the book
Review Questions
Section 1
Chapter 2: Business Intelligence Concepts and Applications
Caselet: Khan Academy – BI in Education
BI for better decisions
Decision types
BI Tools
BI Skills
BI Applications
Customer Relationship Management
Healthcare and Wellness
Education
Retail
Banking
Financial Services
Insurance
Manufacturing
Telecom
Public Sector
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Conclusion
Review Questions
Liberty Stores Case Exercise: Step 1
Chapter 3: Data Warehousing
Caselet: University Health System – BI in Healthcare
Design Considerations for DW
DW Development Approaches
DW Architecture
Data Sources
Data Loading Processes
Data Warehouse Design
DW Access
DW Best Practices
Conclusion
Review Questions
Chapter 4: Data Mining
Caselet: Target Corp – Data Mining in Retail
Gathering and selecting data
Data cleansing and preparation
Outputs of Data Mining
Evaluating Data Mining Results
Data Mining Techniques
Tools and Platforms for Data Mining
Data Mining Best Practices
Myths about data mining
Data Mining Mistakes
Conclusion
Review Questions
Chapter 5: Data Visualization
Caselet: Dr Hans Gosling - Visualizing Global Public Health
Excellence in Visualization
Types of Charts
Visualization Example
Visualization Example phase -2
Tips for Data Visualization
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Conclusion
Review Questions
Section 2
Chapter 6: Decision Trees
Caselet: Predicting Heart Attacks using Decision Trees
Decision Tree problem
Decision Tree Construction
Lessons from constructing trees
Decision Tree Algorithms
Conclusion
Review Questions
Chapter 7: Regression
Caselet: Data driven Prediction Markets
Correlations and Relationships
Visual look at relationships
Regression Exercise
Non-linear regression exercise
Logistic Regression
Advantages and Disadvantages of Regression Models
Conclusion
Review Exercises:
Chapter 8: Artificial Neural Networks
Caselet: IBM Watson - Analytics in Medicine
Business Applications of ANN
Design Principles of an Artificial Neural Network
Representation of a Neural Network
Architecting a Neural Network
Developing an ANN
Advantages and Disadvantages of using ANNs
Conclusion
Review Exercises
Chapter 9: Cluster Analysis
Caselet: Cluster Analysis
Applications of Cluster Analysis
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Definition of a Cluster
Representing clusters
Clustering techniques
Clustering Exercise
K-Means Algorithm for clustering
Selecting the number of clusters
Advantages and Disadvantages of K-Means algorithm
Conclusion
Review Exercises
Chapter 10: Association Rule Mining
Caselet: Netflix: Data Mining in Entertainment
Business Applications of Association Rules
Representing Association Rules
Algorithms for Association Rule
Apriori Algorithm
Association rules exercise
Creating Association Rules
Conclusion
Review Exercises
Section 3
Chapter 11: Text Mining
Caselet: WhatsApp and Private Security
Text Mining Applications
Text Mining Process
Term Document Matrix
Mining the TDM
Comparing Text Mining and Data Mining
Text Mining Best Practices
Conclusion
Review Questions
Chapter 12: Web Mining
Web content mining
Web structure mining
Web usage mining
Web Mining Algorithms
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Conclusion
Review Questions
Chapter 13: Big Data
Caselet: Personalized Promotions at Sears
Defining Big Data
Big Data Landscape
Business Implications of Big Data
Technology Implications of Big Data
Big Data Technologies
Management of Big Data
Conclusion
Review Questions
Chapter 14: Data Modeling Primer
Evolution of data management systems
Relational Data Model
Implementing the Relational Data Model
Database management systems (DBMS)
Structured Query Language
Conclusion
Review Questions
Appendix 1: Data Mining Tutorial with Weka
Appendix 1: Data Mining Tutorial with R
Additional Resources
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Business is the act of doing something productive to serve someone’s needs,
and thus earn a living and make the world a better place. Business activities
are recorded on paper or using electronic media, and then these records
become data. There is more data from customers’ responses and on the
industry as a whole. All this data can be analyzed and mined using special
tools and techniques to generate patterns and intelligence, which reflect how
the business is functioning. These ideas can then be fed back into the business
so that it can evolve to become more effective and efficient in serving
customer needs. And the cycle continues on (Figure 1.1).
Figure 1.1: Business Intelligence and Data Mining Cycle
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Any business organization needs to continually monitor its business
environment and its own performance, and then rapidly adjust its future plans.
This includes monitoring the industry, the competitors, the suppliers, and the
customers. The organization needs to also develop a balanced scorecard to
track its own health and vitality. Executives typically determine what they
want to track based on their key performance Indexes (KPIs) or key result
areas (KRAs). Customized reports need to be designed to deliver the required
information to every executive. These reports can be converted into
customized dashboards that deliver the information rapidly and in easy-to-
grasp formats.
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Analytics in sports was made
popular by the book and movie,
Moneyball. Statistician Bill
James and Oakland A's general
manager, Billy Bean, placed
emphasis on crunching numbers
and data instead of watching an
athlete's style and looks. Their
goal was to make a team better
while using fewer resources. The
key action plan was to pick
important role players at a lower
cost while avoiding the famous
players who demand higher
salaries but may provide a low
return on a team's investment.
Rather than relying on the
scouts' experience and intuition
Bean selected players based
almost exclusively on their on-
base percentage (OBP). By
finding players with a high OBP
but, with characteristics that
lead scouts to dismiss them,
Bean assembled a team of
undervalued players with far
more potential than the A's
hamstrung finances would
otherwise allow.
Using this strategy, they proved

that even small market teams
can be competitive — a case in
point, the Oakland A's. In 2004,
two years after adopting the
same sabermetric model, the
Boston Red Sox won their first
World Series since 1918.
(Source: Moneyball, 2004).
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Q: Could similar techniques
apply to the games of soccer, or
cricket? If so, how?
Q2: What are the general

lessons from this story?
Business intelligence is a broad set of information technology (IT) solutions

that includes tools for gathering, analyzing, and reporting information to the
users about performance of the organization and its environment. These IT
solutions are among the most highly prioritized solutions for investment.
Consider a retail business chain that sells many kinds of goods and services
around the world, online and in physical stores. It generates data about sales,
purchases, and expenses from multiple locations and time frames. Analyzing
this data could help identify fast-selling items, regional-selling items, seasonal
items, fast-growing customer segments, and so on. It might also help generate
ideas about what products sell together, which people tend to buy which
products, and so on. These insights and intelligence can help design better
promotion plans, product bundles, and store layouts, which in turn lead to a
better-performing business.
The vice president of sales of a retail company would want to track the sales
to date against monthly targets, the performance of each store and product
category, and the top store managers that month. The vice president of finance
would be interested in tracking daily revenue, expense, and cash flows by
store; comparing them against plans; measuring cost of capital; and so on.
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Pattern Recognition
A pattern is a design or model that helps grasp something. Patterns help
connect things that may not appear to be connected. Patterns help cut through
complexity and reveal simpler understandable trends. Patterns can be as
definitive as hard scientific rules, like the rule that the sun always rises in the
east. They can also be simple generalizations, such as the Pareto principle,
which states that 80 percent of effects come from 20 percent of the causes.
A perfect pattern or model is one that (a) accurately describes a situation, (b)
is broadly applicable, and (c) can be described in a simple manner. E=MC 2
would be such a general, accurate, and simple (GAS) model. Very often, all
three qualities are not achievable in a single model, and one has to settle for
two of three qualities in the model.
Patterns can be temporal, which is something that regularly occurs over time.
Patterns can also be spatial, such as things being organized in a certain way.
Patterns can be functional, in that doing certain things leads to certain effects.
Good patterns are often symmetric. They echo basic structures and patterns
that we are already aware of.
A temporal rule would be that “some people are always late,” no matter what
the occasion or time. Some people may be aware of this pattern and some
may not be. Understanding a pattern like this would help dissipate a lot of
unnecessary frustration and anger. One can just joke that some people are
born “10 minutes late,” and laugh it away. Similarly, Parkinson’s law states
that works expands to fill up all the time available to do it.
A spatial pattern, following the 80–20 rule, could be that the top 20 percent of
customers lead to 80 percent of the business. Or 20 percent of products
generate 80 percent of the business. Or 80 percent of incoming customer
service calls are related to just 20 percent of the products. This last pattern
may simply reveal a discrepancy between a product’s features and what the
customers believe about the product. The business can then decide to invest in
educating the customers better so that the customer service calls can be
significantly reduced.
A functional pattern may involve test-taking skills. Some students perform

well on essay-type questions. Others do well in multiple-choice questions. Yet
other students excel in doing hands-on projects, or in oral presentations. An
awareness of such a pattern in a class of students can help the teacher design a
balanced testing mechanism that is fair to all.
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Retaining students is an ongoing challenge for universities. Recent data-based
research shows that students leave a school for social reasons more than they
do for academic reasons. This pattern/insight can instigate schools to pay
closer attention to students engaging in extracurricular activities and
developing stronger bonds at school. The school can invest in entertainment
activities, sports activities, camping trips, and other activities. The school can
also begin to actively gather data about every student’s participation in those
activities, to predict at-risk students and take corrective action.
However, long-established patterns can also be broken. The past cannot

always predict the future. A pattern like “all swans are white” does not mean
that there may not be a black swan. Once enough anomalies are discovered,
the underlying pattern itself can shift. The economic meltdown in 2008 to
2009 was because of the collapse of the accepted pattern, that is, “housing
prices always go up.” A deregulated financial environment made markets
more volatile and led to greater swings in markets, leading to the eventual
collapse of the entire financial system.
Diamond mining is the act of digging into large amounts of unrefined ore to
discover precious gems or nuggets. Similarly, data mining is the act of
digging into large amounts of raw data to discover unique nontrivial useful
patterns. Data is cleaned up, and then special tools and techniques can be
applied to search for patterns. Diving into clean and nicely organized data
from the right perspectives can increase the chances of making the right
discoveries.
A skilled diamond miner knows what a diamond looks like. Similarly, a

skilled data miner should know what kinds of patterns to look for. The
patterns are essentially about what hangs together and what is separate.
Therefore, knowing the business domain well is very important. It takes
knowledge and skill to discover the patterns. It is like finding a needle in a
haystack. Sometimes the pattern may be hiding in plain sight. At other times,
it may take a lot of work, and looking far and wide, to find surprising useful
patterns. Thus, a systematic approach to mining data is necessary to
efficiently reveal valuable insights.
For instance, the attitude of employees toward their employer may be

hypothesized to be determined by a large number of factors, such as level of
education, income, tenure in the company, and gender. It may be surprising if
the data reveals that the attitudes are determined first and foremost by their
age bracket. Such a simple insight could be powerful in designing
organizations effectively. The data miner has to be open to any and all
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possibilities.
When used in clever ways, data mining can lead to interesting insights and be
a source of new ideas and initiatives. One can predict the traffic pattern on
highways from the movement of cell phone (in the car) locations on the
highway. If the locations of cell phones on a highway or roadway are not
moving fast enough, it may be a sign of traffic congestion. Telecom
companies can thus provide real-time traffic information to the drivers on
their cell phones, or on their GPS devices, without the need of any video
cameras or traffic reporters.
Similarly, organizations can find out an employee’s arrival time at the office
by when their cell phone shows up in the parking lot. Observing the record of
the swipe of the parking permit card in the company parking garage can
inform the organization whether an employee is in the office building or out
of the office at any moment in time.
Some patterns may be so sparse that a very large amount of diverse data has
to be seen together to notice any connections. For instance, locating the debris
of a flight that may have vanished midcourse would require bringing together
data from many sources, such as satellites, ships, and navigation systems. The
raw data may come with various levels of quality, and may even be
conflicting. The data at hand may or may not be adequate for finding good
patterns. Additional dimensions of data may need to be added to help solve
the problem.
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Data is the new natural resource. Implicit in this statement is the recognition
of hidden value in data. Data lies at the heart of business intelligence. There is
a sequence of steps to be followed to benefit from the data in a systematic
way. Data can be modeled and stored in a database. Relevant data can be
extracted from the operational data stores according to certain reporting and
analyzing purposes, and stored in a data warehouse. The data from the
warehouse can be combined with other sources of data, and mined using data
mining techniques to generate new insights. The insights need to be
visualized and communicated to the right audience in real time for
competitive advantage. Figure 1.2 explains the progression of data processing
activities. The rest of this chapter will cover these five elements in the data
processing chain.
Figure 1.2: Data Processing Chain
Data
Anything that is recorded is data. Observations and facts are data. Anecdotes
and opinions are also data, of a different kind. Data can be numbers, like the
record of daily weather, or daily sales. Data can be alphanumeric, such as the
names of employees and customers.

1. Data could come from any number of sources. It could come from
operational records inside an organization, and it can come from records
compiled by the industry bodies and government agencies. Data could
come from individuals telling stories from memory and from people’s
interaction in social contexts. Data could come from machines reporting
their own status or from logs of web usage.
2. Data can come in many ways. It may come as paper reports. It may come
as a file stored on a computer. It may be words spoken over the phone. It
may be e-mail or chat on the Internet. It may come as movies and songs
in DVDs, and so on.
3. There is also data about data. It is called metadata. For example, people
regularly upload videos on YouTube. The format of the video file
(whether it was a high-def file or lower resolution) is metadata. The
information about the time of uploading is metadata. The account from
which it was uploaded is also metadata. The record of downloads of the
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video is also metadata.
Data can be of different types.

1. Data could be an unordered collection of values. For example, a retailer

sells shirts of red, blue, and green colors. There is no intrinsic ordering
among these color values. One can hardly argue that any one color is
higher or lower than the other. This is called nominal (means names)
data.
2. Data could be ordered values like small, medium and large. For example,
the sizes of shirts could be extra-small, small, medium, and large. There
is clarity that medium is bigger than small, and large is bigger than
medium. But the differences may not be equal. This is called ordinal
(ordered) data.
3. Another type of data has discrete numeric values defined in a certain
range, with the assumption of equal distance between the values.
Customer satisfaction score may be ranked on a 10-point scale with 1
being lowest and 10 being highest. This requires the respondent to
carefully calibrate the entire range as objectively as possible and place
his own measurement in that scale. This is called interval (equal
intervals) data.
4. The highest level of numeric data is ratio data which can take on any
numeric value. The weights and heights of all employees would be exact
numeric values. The price of a shirt will also take any numeric value. It
is called ratio (any fraction) data.
5. There is another kind of data that does not lend itself to much
mathematical analysis, at least not directly. Such data needs to be first
structured and then analyzed. This includes data like audio, video, and
graphs files, often called BLOBs (Binary Large Objects). These kinds of
data lend themselves to different forms of analysis and mining. Songs
can be described as happy or sad, fast-paced or slow, and so on. They
may contain sentiment and intention, but these are not quantitatively
precise.
The precision of analysis increases as data becomes more numeric. Ratio data
could be subjected to rigorous mathematical analysis. For example, precise
weather data about temperature, pressure, and humidity can be used to create
rigorous mathematical models that can accurately predict future weather.
Data may be publicly available and sharable, or it may be marked private.

Traditionally, the law allows the right to privacy concerning one’s personal
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data. There is a big debate on whether the personal data shared on social
media conversations is private or can be used for commercial purposes.
Datafication is a new term that means that almost every phenomenon is now
being observed and stored. More devices are connected to the Internet. More
people are constantly connected to “the grid,” by their phone network or the
Internet, and so on. Every click on the web, and every movement of the
mobile devices, is being recorded. Machines are generating data. The
“Internet of things” is growing faster than the Internet of people. All of this is
generating an exponentially growing volume of data, at high velocity.
Kryder’s law predicts that the density and capability of hard drive storage
media will double every 18 months. As storage costs keep coming down at a
rapid rate, there is a greater incentive to record and store more events and
activities at a higher resolution. Data is getting stored in more detailed
resolution, and many more variables are being captured and stored.
Database
A database is a modeled collection of data that is accessible in many ways. A
data model can be designed to integrate the operational data of the
organization. The data model abstracts the key entities involved in an action
and their relationships. Most databases today follow the relational data model
and its variants. Each data modeling technique imposes rigorous rules and
constraints to ensure the integrity and consistency of data over time.
Take the example of a sales organization. A data model for managing

customer orders will involve data about customers, orders, products, and their
interrelationships. The relationship between the customers and orders would
be such that one customer can place many orders, but one order will be placed
by one and only one customer. It is called a one-to-many relationship. The
relationship between orders and products is a little more complex. One order
may contain many products. And one product may be contained in many
different orders. This is called a many-to-many relationship. Different types
of relationships can be modeled in a database.
Databases have grown tremendously over time. They have grown in

complexity in terms of number of the objects and their properties being
recorded. They have also grown in the quantity of data being stored. A decade
ago, a terabyte-sized database was considered big. Today databases are in
petabytes and exabytes. Video and other media files have greatly contributed
to the growth of databases. E-commerce and other web-based activities also
generate huge amounts of data. Data generated through social media has also
generated large databases. The e-mail archives, including attached documents
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of organizations, are in similar large sizes.
Many database management software systems (DBMSs) are available to help

store and manage this data. These include commercial systems, such as
Oracle and DB2 system. There are also open-source, free DBMS, such as
MySQL and Postgres. These DBMSs help process and store millions of
transactions worth of data every second.
Here is a simple database of the sales of movies worldwide for a retail

organization. It shows sales transactions of movies over three quarters. Using
such a file, data can be added, accessed, and updated as needed.

Movies Transactions Database

Order # Date sold Product name Location Amount

1 April 2015 Monty Python US $9

2 May 2015 Gone With the Wind US $15

3 June 2015 Monty Python India $9

4 June 2015 Monty Python UK $12

5 July 2015 Matrix US $12

6 July 2015 Monty Python US $12

7 July 2015 Gone With the Wind US $15

8 Aug 2015 Matrix US $12

9 Sept 2015 Matrix India $12

10 Sept 2015 Monty Python US $9

11 Sept 2015 Gone With the Wind US $15
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12 Sept 2015 Monty Python India $9

13 Nov 2015 Gone With the Wind US $15

14 Dec 2015 Monty Python US $9

15 Dec 2015 Monty Python US $9
Data Warehouse
A data warehouse is an organized store of data from all over the organization,
specially designed to help make management decisions. Data can be extracted
from operational database to answer a particular set of queries. This data,
combined with other data, can be rolled up to a consistent granularity and
uploaded to a separate data store called the data warehouse. Therefore, the
data warehouse is a simpler version of the operational data base, with the
purpose of addressing reporting and decision-making needs only. The data in
the warehouse cumulatively grows as more operational data becomes
available and is extracted and appended to the data warehouse. Unlike in the
operational database, the data values in the warehouse are not updated.
To create a simple data warehouse for the movies sales data, assume a simple
objective of tracking sales of movies and making decisions about managing
inventory. In creating this data warehouse, all the sales transaction data will
be extracted from the operational data files. The data will be rolled up for all
combinations of time period and product number. Thus, there will be one row
for every combination of time period and product. The resulting data
warehouse will look like the table that follows.

Movies Sales Data Warehouse

Row# Qtr sold Product name Amount

1 Q2 Gone With the Wind $15

2 Q2 Monty Python $30

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4 Q3 Matrix $36



The data in the data warehouse is at much less detail than the transaction
database. The data warehouse could have been designed at a lower or higher
level of detail, or granularity. If the data warehouse were designed on a
monthly level, instead of a quarterly level, there would be many more rows of
data. When the number of transactions approaches millions and higher, with
dozens of attributes in each transaction, the data warehouse can be large and
rich with potential insights. One can then mine the data (slice and dice) in
many different ways and discover unique meaningful patterns. Aggregating
the data helps improve the speed of analysis. A separate data warehouse
allows analysis to go on separately in parallel, without burdening the
operational database systems (Table 1.1).

Function Database Data Warehouse

Data stored in databases can be Data stored in DW is
Purpose used for many purposes cleansed data useful for
including day-to-day operations reporting and analysis

Highly granular data including Lower granularity data;
Granularity all activity and transaction rolled up to certain key
details dimensions of interest

Highly complex with dozens or Typically organized around
Complexity hundreds of data files, linked a large fact tables, and
through common data fields many lookup tables

Database grows with growing Grows as data from
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volumes of activity and operational databases is
Size transactions. Old completed rolled-up and appended
transactions are deleted to reduce every day. Data is retained
size. for long-term trend analyses

Architectural Relational, and object-oriented, Star schema, or Snowflake
choices databases schema

Primarily through high level
Accessed through SQL;
languages such as SQL.
Data Access SQL output is forwarded to
Traditional programming access
mechanisms reporting tools and data
DB through Open DataBase
visualization tools
Connectivity (ODBC) interfaces
Table 1.1: Comparing Database systems with Data Warehousing systems
Data Mining
Data Mining is the art and science of discovering useful innovative patterns
from data. There is a wide variety of patterns that can be found in the data.
There are many techniques, simple or complex, that help with finding
patterns.
In this example, a simple data analysis technique can be applied to the data in
the data warehouse above. A simple cross-tabulation of results by quarter and
products will reveal some easily visible patterns.

Movies Sales by Quarters – Cross-tabulation

Qtr/Product Gone With the Wind Matrix Monty Python Total Sales Amount

Q2 $15 0 $30 $45

Q3 $30 $36 $30 $96

Q4 $15 0 $18 $33

Total Sales Amount $60 $36 $78 $174
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Based on the cross-tabulation above, one can readily answer some product
sales questions, like:

1. What is the best selling movie by revenue? – Monty Python.

2. What is the best quarter by revenue this year? – Q3
3. Any other patterns? – Matrix movie sells only in Q3 (seasonal item).
These simple insights can help plan marketing promotions and manage
inventory of various movies.
If a cross tabulation was designed to include customer location data, one

could answer other questions, such as

1. What is the best selling geography? – US

2. What is the worst selling geography? – UK
3. Any other patterns? – Monty Python sells globally, while Gone with the
Wind sells only in the US.
If the data mining was done at the monthly level of data, it would be easy to
miss the seasonality of the movies. However, one would have observed that
September is the highest selling month.
The previous example shows that many differences and patterns can be
noticed by analyzing data in different ways. However, some insights are more
important than others. The value of the insight depends upon the problem
being solved. The insight that there are more sales of a product in a certain
quarter helps a manager plan what products to focus on. In this case, the store
manager should stock up on Matrix in Quarter 3 (Q3). Similarly, knowing
which quarter has the highest overall sales allows for different resource
decisions in that quarter. In this case, if Q3 is bringing more than half of total
sales, this requires greater attention on the e-commerce website in the third
quarter.
Data mining should be done to solve high-priority, high-value problems.

Much effort is required to gather data, clean and organize it, mine it with
many techniques, interpret the results, and find the right insight. It is
important that there be a large expected payoff from finding the insight. One
should select the right data (and ignore the rest), organize it into a nice and
imaginative framework that brings relevant data together, and then apply data
mining techniques to deduce the right insight.
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A retail company may use data mining techniques to determine which new
product categories to add to which of their stores; how to increase sales of
existing products; which new locations to open stores in; how to segment the
customers for more effective communication; and so on.
Data can be analyzed at multiple levels of granularity and could lead to a

large number of interesting combinations of data and interesting patterns.
Some of the patterns may be more meaningful than the others. Such highly
granular data is often used, especially in finance and high-tech areas, so that
one can gain even the slightest edge over the competition.
Here are brief descriptions of some of the most important data mining
techniques used to generate insights from data.
Decision Trees: They help classify populations into classes. It is said that 70%
of all data mining work is about classification solutions; and that 70% of all
classification work uses decision trees. Thus, decision trees are the most
popular and important data mining technique. There are many popular
algorithms to make decision trees. They differ in terms of their mechanisms
and each technique work well for different situations. It is possible to try
multiple decision-tree algorithms on a data set and compare the predictive
accuracy of each tree.
Regression: This is a well-understood technique from the field of statistics.

The goal is to find a best fitting curve through the many data points. The best
fitting curve is that which minimizes the (error) distance between the actual
data points and the values predicted by the curve. Regression models can be
projected into the future for prediction and forecasting purposes.
Artificial Neural Networks: Originating in the field of artificial intelligence

and machine learning, ANNs are multi-layer non-linear information
processing models that learn from past data and predict future values. These
models predict well, leading to their popularity. The model’s parameters may
not be very intuitive. Thus, neural networks are opaque like a black-box.
These systems also require a large amount of past data to adequate train the
system.
Cluster analysis: This is an important data mining technique for dividing and
conquering large data sets. The data set is divided into a certain number of
clusters, by discerning similarities and dissimilarities within the data. There is
no one right answer for the number of clusters in the data. The user needs to
make a decision by looking at how well the number of clusters chosen fit the
data. This is most commonly used for market segmentation. Unlike decision
26
trees and regression, there is no one right answer for cluster analysis.
Association Rule Mining: Also called Market Basket Analysis when used in
retail industry, these techniques look for associations between data values. An
analysis of items frequently found together in a market basket can help cross-
sell products, and also create product bundles.
Data Visualization
As data and insights grow in number, a new requirement is the ability of the
executives and decision makers to absorb this information in real time. There
is a limit to human comprehension and visualization capacity. That is a good
reason to prioritize and manage with fewer but key variables that relate
directly to the Key Result Areas (KRAs) of a role.
Here are few considerations when presenting using data:

1. Present the conclusions and not just report the data.

2. Choose wisely from a palette of graphs to suit the data.
3. Organize the results to make the central point stand out.
4. Ensure that the visuals accurately reflect the numbers. Inappropriate
visuals can create misinterpretations and misunderstandings.
5. Make the presentation unique, imaginative and memorable.
Executive dashboards are designed to provide information on select few

variables for every executive. They use graphs, dials, and lists to show the
status of important parameters. These dashboards also have a drill-down
capability to enable a root-cause analysis of exception situations (Figure 1.3).
27
Figure 1.3: Sample Executive Dashboard
Data visualization has been an interesting problem across the disciplines.

Many dimensions of data can be effectively displayed on a two-dimensional
surface to give a rich and more insightful description of the totality of the
story.
The classic presentation of the story of Napoleon’s march to Russia in 1812,

by French cartographer Joseph Minard, is shown in Figure 1.4. It covers about
six dimensions. Time is on horizontal axis. The geographical coordinates and
rivers are mapped in. The thickness of the bar shows the number of troops at
any point of time that is mapped. One color is used for the onward march and
another for the retreat. The weather temperature at each time is shown in the
line graph at the bottom.
Figure 1.4: Sample Data Visualization
28
This chapter is designed to provide the wholeness of business intelligence and
data mining, to provide the reader with an intuition for this area of
knowledge. The rest of the book can be considered in three sections.
Section 1 will cover high level topics. Chapter 2 will cover the field of
business intelligence and its applications across industries and functions.
Chapter 3 will briefly explain what is data warehousing and how does it help
with data mining. Chapter 4 will then describe data mining in some detail
with an overview of its major tools and techniques.
Section 2 is focused on data mining techniques. Every technique will be

shown through solving an example in details. Chapter 5 will show the power
and ease of decision trees, which are the most popular data mining technique.
Chapter 6 will describe statistical regression modeling techniques. Chapter 7
will provide an overview of artificial neural networks, a versatile machine
learning technique. Chapter 8 will describe how Cluster Analysis can help
with market segmentation. Finally, chapter 9 will describe the Association
Rule Mining technique, also called Market Basket Analysis, that helps finds
shopping patterns.
Section 3 will cover more advanced new topics. Chapter 10 will introduce
the concepts and techniques of Text Mining, that helps discover insights from
text data including social media data. Chapter 11 will cover provide an
overview of the growing field of web mining, which includes mining the
structure, content and usage of web sites. Chapter 12 will provide an
overview of the recent field of Big Data. Chapter 13 has been added as a
primer on Data Modeling, for those who do not have any background in
databases, and should be used if necessary.
29
Review Questions

1: Describe the Business Intelligence and Data Mining cycle.
2: Describe the data processing chain.
3: What are the similarities between diamond mining and data mining?
4: What are the different data mining techniques? Which of these would be
relevant in your current work?
5: What is a dashboard? How does it help?
6: Create a visual to show the weather pattern in your city. Could you show
together temperature, humidity, wind, and rain/snow over a period of time.
30
Section 1

This section covers three important high-level topics.
Chapter 2 will cover business intelligence concepts, and its applications in

many industries.
Chapter 3 will describe data warehousing systems, and ways of creating and
managing them.
Chapter 4 will describe data mining as a whole, its many techniques, and with
many do’s and don’ts of effective data mining.
Chapter 5 will describe data visualization as a whole, with techniques and

examples, and with many thumb rules of effective data visualizations.

31
Business intelligence (BI) is an umbrella term that includes a variety of IT

applications that are used to analyze an organization’s data and communicate
the information to relevant users. (Figure 2.1).
Figure 2.1: BIDM cycle
The nature of life and businesses is to grow. Information is the life-blood of

business. Businesses use many techniques for understanding their
environment and predicting the future for their own benefit and growth.
Decisions are made from facts and feelings. Data-based decisions are more
effective than those based on feelings alone. Actions based on accurate data,
information, knowledge, experimentation, and testing, using fresh insights,
can more likely succeed and lead to sustained growth. One’s own data can be
the most effective teacher. Therefore, organizations should gather data, sift
through it, analyze and mine it, find insights, and then embed those insights
into their operating procedures.
There is a new sense of importance and urgency around data as it is being

viewed as a new natural resource. It can be mined for value, insights, and
competitive advantage. In a hyperconnected world, where everything is
potentially connected to everything else, with potentially infinite correlations,
data represents the impulses of nature in the form of certain events and
attributes. A skilled business person is motivated to use this cache of data to
harness nature, and to find new niches of unserved opportunities that could
become profitable ventures.
32
33
Khan Academy is an innovative
non-profit educational
organization that is turning the
K-12 education system upside
down. It provides short YouTube
based video lessons on
thousands of topics for free. It
shot into prominence when Bill
Gates promoted it as a resource
that he used to teach his own
children. With this kind of a
resource classrooms are being
flipped … i.e. student do their
basic lecture-type learning at
home using those videos, while
the class time is used for more
one-on-one problem solving and
coaching. Students can access
the lessons at any time to learn
at their own pace. The students’
progress is recorded including
what videos they watched how
many times, which problems they
stumbled on, and what scores
they got on online tests.
Khan Academy has developed

tools to help teachers get a pulse
on what's happening in the
classroom. Teachers are
provided a set of real-time
dashboards to give them
information from the macro level
("How is my class doing on
geometry?") to the micro level
("How is Jane doing on
mastering polygons?") Armed
with this information, teachers
can place selective focus on the
students that need certain help.
34
(Source: KhanAcademy.org)
Q1: How does a dashboard

improve the teaching
experience? And the student’s
learning experience?
Q2: Design a dashboard for

tracking your own career.
35
The future is inherently uncertain. Risk is the result of a probabilistic world
where there are no certainties and complexities abound. People use crystal
balls, astrology, palmistry, ground hogs, and also mathematics and numbers to
mitigate risk in decision-making. The goal is to make effective decisions,
while reducing risk. Businesses calculate risks and make decisions based on a
broad set of facts and insights. Reliable knowledge about the future can help
managers make the right decisions with lower levels of risk.
The speed of action has risen exponentially with the growth of the Internet. In
a hypercompetitive world, the speed of a decision and the consequent action
can be a key advantage. The Internet and mobile technologies allow decisions
to be made anytime, anywhere. Ignoring fast-moving changes can threaten the
organization’s future. Research has shown that an unfavorable comment about
the company and its products on social media should not go unaddressed for
long. Banks have had to pay huge penalties to Consumer Financial Protection
Bureau (CFPB) in United States in 2013 for complaints made on CFPB’s
websites. On the other hand, a positive sentiment expressed on social media
should also be utilized as a potential sales and promotion opportunity, while
the opportunity lasts.
36
Decision types
There are two main kinds of decisions: strategic decisions and operational
decisions. BI can help make both better. Strategic decisions are those that
impact the direction of the company. The decision to reach out to a new
customer set would be a strategic decision. Operational decisions are more
routine and tactical decisions, focused on developing greater efficiency.
Updating an old website with new features will be an operational decision.
In strategic decision-making, the goal itself may or may not be clear, and the
same is true for the path to reach the goal. The consequences of the decision
would be apparent some time later. Thus, one is constantly scanning for new
possibilities and new paths to achieve the goals. BI can help with what-if
analysis of many possible scenarios. BI can also help create new ideas based
on new patterns found from data mining.
Operational decisions can be made more efficient using an analysis of past

data. A classification system can be created and modeled using the data of
past instances to develop a good model of the domain. This model can help
improve operational decisions in the future. BI can help automate operations
level decision-making and improve efficiency by making millions of
microlevel operational decisions in a model-driven way. For example, a bank
might want to make decisions about making financial loans in a more
scientific way using data-based models. A decision-tree-based model could
provide a consistently accurate loan decisions. Developing such decision tree
models is one of the main applications of data mining techniques.
Effective BI has an evolutionary component, as business models evolve.

When people and organizations act, new facts (data) are generated. Current
business models can be tested against the new data, and it is possible that
those models will not hold up well. In that case, decision models should be
revised and new insights should be incorporated. An unending process of
generating fresh new insights in real time can help make better decisions, and
thus can be a significant competitive advantage.
37
BI Tools
BI includes a variety of software tools and techniques to provide the
managers with the information and insights needed to run the business.
Information can be provided about the current state of affairs with the
capability to drill down into details, and also insights about emerging patterns
which lead to projections into the future. BI tools include data warehousing,
online analytical processing, social media analytics, reporting, dashboards,
querying, and data mining.
BI tools can range from very simple tools that could be considered end-user
tools, to very sophisticated tools that offer a very broad and complex set of
functionality. Thus, Even executives can be their own BI experts, or they can
rely on BI specialists to set up the BI mechanisms for them. Thus, large
organizations invest in expensive sophisticated BI solutions that provide good
information in real time.
A spreadsheet tool, such as Microsoft Excel, can act as an easy but effective
BI tool by itself. Data can be downloaded and stored in the spreadsheet, then
analyzed to produce insights, then presented in the form of graphs and tables.
This system offers limited automation using macros and other features. The
analytical features include basic statistical and financial functions. Pivot
tables help do sophisticated what-if analysis. Add-on modules can be installed
to enable moderately sophisticated statistical analysis.
A dashboarding system, such as IBM Cognos or Tableau, can offer a

sophisticated set of tools for gathering, analyzing, and presenting data. At the
user end, modular dashboards can be designed and redesigned easily with a
graphical user interface. The back-end data analytical capabilities include
many statistical functions. The dashboards are linked to data warehouses at
the back end to ensure that the tables and graphs and other elements of the
dashboard are updated in real time (Figure 2.2).
38
Figure 2.2: Sample Executive Dashboard
Data mining systems, such as IBM SPSS Modeler, are industrial strength
systems that provide capabilities to apply a wide range of analytical models
on large data sets. Open source systems, such as Weka, are popular platforms
designed to help mine large amounts of data to discover patterns.
39
BI Skills
As data grows and exceeds our capacity to make sense of it, the tools need to
evolve, and so should the imagination of the BI specialist. “Data Scientist”
has been called as the hottest job of this decade.
A skilled and experienced BI specialist should be open enough to go outside

the box, open the aperture and see a wider perspective that includes more
dimensions and variables, in order to find important patterns and insights. The
problem needs to be looked at from a wider perspective to consider many
more angles that may not be immediately obvious. An imaginative solution
should be proposed for the problem so that interesting and useful results can
emerge.
A good data mining project begins with an interesting problem to solve.

Selecting the right data mining problem is an important skill. The problem
should be valuable enough that solving it would be worth the time and
expense. It takes a lot of time and energy to gather, organize, cleanse, and
prepare the data for mining and other analysis. The data miner needs to persist
with the exploration of patterns in the data. The skill level has to be deep
enough to engage with the data and make it yield new useful insights.
40
BI Applications
BI tools are required in almost all industries and functions. The nature of the
information and the speed of action may be different across businesses, but
every manager today needs access to BI tools to have up-to-date metrics
about business performance. Businesses need to embed new insights into their
operating processes to ensure that their activities continue to evolve with
more efficient practices. The following are some areas of applications of BI
and data mining.

A business exists to serve a customer. A happy customer becomes a repeat
customer. A business should understand the needs and sentiments of the
customer, sell more of its offerings to the existing customers, and also, expand
the pool of customers it serves. BI applications can impact many aspects of
marketing.

1. Maximize the return on marketing campaigns: Understanding the

customer’s pain points from data-based analysis can ensure that the
marketing messages are fine-tuned to better resonate with customers.
2. Improve customer retention (churn analysis): It is more difficult and

expensive to win new customers than it is to retain existing customers.
Scoring each customer on their likelihood to quit, can help the business
design effective interventions, such as discounts or free services, to
retain profitable customers in a cost-effective manner.
3. Maximize customer value (cross-, up-selling): Every contact with the

customer should be seen as an opportunity to gauge their current needs.
Offering a customer new products and solutions based on those imputed
needs can help increase revenue per customer. Even a customer
complaint can be seen as an opportunity to wow the customer. Using the
knowledge of the customer’s history and value, the business can choose
to sell a premium service to the customer.
4. Identify and delight highly-valued customers. By segmenting the

customers, the best customers can be identified. They can be proactively
contacted, and delighted, with greater attention and better service.
Loyalty programs can be managed more effectively.
41
5. Manage brand image. A business can create a listening post to listen to
social media chatter about itself. It can then do sentiment analysis of the
text to understand the nature of comments, and respond appropriately to
the prospects and customers.

Health care is one of the biggest sectors in advanced economies. Evidence-
based medicine is the newest trend in data-based health care management. BI
applications can help apply the most effective diagnoses and prescriptions for
various ailments. They can also help manage public health issues, and reduce
waste and fraud.

1. Diagnose disease in patients: Diagnosing the cause of a medical

condition is the critical first step in a medical engagement. Accurately
diagnosing cases of cancer or diabetes can be a matter of life and death
for the patient. In addition to the patient’s own current situation, many
other factors can be considered, including the patient’s health history,
medication history, family’s history, and other environmental factors.
This makes diagnosis as much of an art form as it is science. Systems,
such as IBM Watson, absorb all the medical research to date and make
probabilistic diagnoses in the form of a decision tree, along with a full
explanation for their recommendations. These systems take away most
of the guess work done by doctors in diagnosing ailments.
2. Treatment effectiveness: The prescription of medication and treatment is

also a difficult choice out of so many possibilities. For example, there
are more than 100 medications for hypertension (high blood pressure)
alone. There are also interactions in terms of which drugs work well with
others and which drugs do not. Decision trees can help doctors learn
about and prescribe more effective treatments. Thus, the patients could
recover their health faster with a lower risk of complications and cost.
3. Wellness management: This includes keeping track of patient health

records, analyzing customer health trends and proactively advising them
to take any needed precautions.
4. Manage fraud and abuse: Some medical practitioners have unfortunately
42
been found to conduct unnecessary tests, and/or overbill the government
and health insurance companies. Exception reporting systems can
identify such providers and action can be taken against them.
5. Public health management: The management of public health is one of

the important responsibilities of any government. By using effective
forecasting tools and techniques, governments can better predict the
onset of disease in certain areas in real time. They can thus be better
prepared to fight the diseases. Google has been known to predict the
movement of certain diseases by tracking the search terms (like flu,
vaccine) used in different parts of the world.
Education
As higher education becomes more expensive and competitive, it becomes a
great user of data-based decision-making. There is a strong need for
efficiency, increasing revenue, and improving the quality of student
experience at all levels of education.

1. Student Enrollment (Recruitment and Retention): Marketing to new

potential students requires schools to develop profiles of the students that
are most likely to attend. Schools can develop models of what kinds of
students are attracted to the school, and then reach out to those students.
The students at risk of not returning can be flagged, and corrective
measures can be taken in time.
2. Course offerings: Schools can use the class enrolment data to develop
models of which new courses are likely to be more popular with
students. This can help increase class size, reduce costs, and improve
student satisfaction.
3. Fund-raising from Alumni and other donors: Schools can develop

predictive models of which alumni are most likely to pledge financial
support to the school. Schools can create a profile for alumni more likely
to pledge donations to the school. This could lead to a reduction in the
cost of mailings and other forms of outreach to alumni.
Retail
Retail organizations grow by meeting customer needs with quality products,
in a convenient, timely, and cost-effective manner. Understanding emerging
43
customer shopping patterns can help retailers organize their products,
inventory, store layout, and web presence in order to delight their customers,
which in turn would help increase revenue and profits. Retailers generate a lot
of transaction and logistics data that can be used to diagnose and solve
problems.

1. Optimize inventory levels at different locations: Retailers need to manage

their inventories carefully. Carrying too much inventory imposes
carrying costs, while carrying too little inventory can cause stock-outs
and lost sales opportunities. Predicting sales trends dynamically can help
retailers move inventory to where it is most in demand. Retail
organizations can provide their suppliers with real time information
about sales of their items, so the suppliers can deliver their product to the
right locations and minimize stock-outs.
2. Improve store layout and sales promotions: A market basket analysis can
develop predictive models of which products sell together often. This
knowledge of affinities between products can help retailers co-locate
those products. Alternatively, those affinity products could be located
farther apart to make the customer walk the length and breadth of the
store, and thus be exposed to other products. Promotional discounted
product bundles can be created to push a nonselling item along with a set
of products that sell well together.
3. Optimize logistics for seasonal effects: Seasonal products offer

tremendously profitable short-term sales opportunities, yet they also
offer the risk of unsold inventories at the end of the season.
Understanding which products are in season in which market can help
retailers dynamically manage prices to ensure their inventory is sold
during the season. If it is raining in a certain area, then the inventory of
umbrella and ponchos could be rapidly moved there from nonrainy areas
to help increase sales.
4. Minimize losses due to limited shelf life: Perishable goods offer

challenges in terms of disposing off the inventory in time. By tracking
sales trends, the perishable products at risk of not selling before the sell-
by date, can be suitably discounted and promoted.
Banking
44
Banks make loans and offer credit cards to millions of customers. They are
most interested in improving the quality of loans and reducing bad debts.
They also want to retain more good customers, and sell more services to
them.

1. Automate the loan application process: Decision models can be
generated from past data that predict the likelihood of a loan proving
successful. These can be inserted in business processes to automate the
financial loan approval process.
2. Detect fraudulent transactions: Billions of financial transactions happen

around the world every day. Exception-seeking models can identify
patterns of fraudulent transactions. For example, if money is being
transferred to an unrelated account for the first time, it could be a
fraudulent transaction.
3. Maximize customer value (cross-, up-selling). Selling more products and

services to existing customers is often the easiest way to increase
revenue. A checking account customer in good standing could be offered
home, auto, or educational loans on more favorable terms than other
customers, and thus, the value generated from that customer could be
increased.
4. Optimize cash reserves with forecasting. Banks have to maintain certain

liquidity to meet the needs of depositors who may like to withdraw
money. Using past data and trend analysis, banks can forecast how much
to keep and invest the rest to earn interest.
Financial Services
Stock brokerages are an intensive user of BI systems. Fortunes can be made
or lost based on access to accurate and timely information.

1. Predict changes in bond and stock prices: Forecasting the price of stocks
and bonds is a favorite pastime of financial experts as well as lay people.
Stock transaction data from the past, along with other variables, can be
used to predict future price patterns. This can help traders develop long-
term trading strategies.
45
2. Assess the effect of events on market movements. Decision models using
decision trees can be created to assess the impact of events on changes in
market volume and prices. Monetary policy changes (such as Federal
Reserve interest rate change) or geopolitical changes (such as war in a
part of the world) can be factored into the predictive model to help take
action with greater confidence and less risk.
3. Identify and prevent fraudulent activities in trading: There have

unfortunately been many cases of insider trading, leading to many
prominent financial industry stalwarts going to jail. Fraud detection
models seek out-of-the-ordinary activities, and help identify and flag
fraudulent activity patterns.
Insurance
This industry is a prolific user of prediction models in pricing insurance
proposals and managing losses from claims against insured assets.

1. Forecast claim costs for better business planning: When natural

disasters, such as hurricanes and earthquakes strike, loss of life and
property occurs. By using the best available data to model the likelihood
(or risk) of such events happening, the insurer can plan for losses and
manage resources and profits effectively.
2. Determine optimal rate plans: Pricing an insurance rate plan requires

covering the potential losses and making a profit. Insurers use actuary
tables to project life spans and disease tables to project mortality rates,
and thus price themselves competitively yet profitably.
3. Optimize marketing to specific customers: By micro-segmenting

potential customers, a data-savvy insurer can cherry pick the best
customers and leave the less profitable customers to its competitors.
Progressive Insurance is a US-based company that is known to actively
use data mining to cherry pick customers and increase its profitability.
4. Identify and prevent fraudulent claim activities. Patterns can be

identified as to where and what kinds of fraud are more likely to occur.
Decision-tree-based models can be used to identify and flag fraudulent
46
claims.
Manufacturing
Manufacturing operations are complex systems with inter-related sub-
systems. From machines working right, to workers having the right skills, to
the right components arriving with the right quality at the right time, to
money to source the components, many things have to go right. Toyota’s
famous lean manufacturing company works on just-in-time inventory systems
to optimize investments in inventory and to improve flexibility in their
product-mix.

1. Discover novel patterns to improve product quality: Quality of a product

can also be tracked, and this data can be used to create a predictive
model of product quality deteriorating. Many companies, such as
automobile companies, have to recall their products if they have found
defects that have a public safety implication. Data mining can help with
root cause analysis that can be used to identify sources of errors and help
improve product quality in the future.
2. Predict/prevent machinery failures: Statistically, all equipment is likely

to break down at some point in time. Predicting which machine is likely
to shut down is a complex process. Decision models to forecast
machinery failures could be constructed using past data. Preventive
maintenance can be planned, and manufacturing capacity can be
adjusted, to account for such maintenance activities.
Telecom
BI in telecom can help with the customer side as well as network side of the
operations. Key BI applications include churn management,
marketing/customer profiling, network failure, and fraud detection.

1. Churn management: Telecom customers have shown a tendency to
switch their providers in search for better deals. Telecom companies tend
to respond with many incentives and discounts to hold on to customers.
However, they need to determine which customers are at a real risk of
switching and which others are just negotiating for a better deal. The
level of risk should to be factored into the kind of deals and discounts
that should be given. Millions of such customer calls happen every
month. The telecom companies need to provide a consistent and data-
based way to predict the risk of the customer switching, and then make
47
an operational decision in real time while the customer call is taking
place. A decision-tree- or a neural network-based system can be used to
guide the customer-service call operator to make the right decisions for
the company, in a consistent manner.
2. Marketing and product creation. In addition to customer data, telecom

companies also store call detail records (CDRs), which can be analyzed
to precisely describe the calling behavior of each customer. This unique
data can be used to profile customers and then can be used for creating
new products/services bundles for marketing purposes. An American
telecom company, MCI, created a program called Friends & Family that
allowed free calls with one’s friends and family on that network, and
thus, effectively locked many people into their network.
3. Network failure management: Failure of telecom networks for technical

failures or malicious attacks can have devastating impacts on people,
businesses, and society. In telecom infrastructure, some equipment will
likely fail with certain mean time between failures. Modeling the failure
pattern of various components of the network can help with preventive
maintenance and capacity planning.
4. Fraud Management: There are many kinds of fraud in consumer

transactions. Subscription fraud occurs when a customer opens an
account with the intention of never paying for the services.
Superimposition fraud involves illegitimate activity by a person other
than the legitimate account holder. Decision rules can be developed to
analyze each CDR in real time to identify chances of fraud and take
effective action.
Public Sector
Government gathers a large amount of data by virtue of their regulatory
function. That data could be analyzed for developing models of effective
functioning. There are innumerable applications that can benefit from mining
that data. A couple of sample applications are shown here.

1. Law enforcement: Social behavior is a lot more patterned and predictable
than one would imagine. For example, Los Angeles Police Department
(LAPD) mined the data from its 13 million crime records over 80 years
and developed models of what kind of crime going to happen when and
48
where. By increasing patrolling in those particular areas, LAPD was able
to reduce property crime by 27 percent. Internet chatter can be analyzed
to learn of and prevent any evil designs.
2. Scientific research: Any large collection of research data is amenable to

being mined for patterns and insights. Protein folding (microbiology),
nuclear reaction analysis (sub-atomic physics), disease control (public
health) are some examples where data mining can yield powerful new
insights.
49
Conclusion
Business Intelligence is a comprehensive set of IT tools to support decision
making with imaginative solutions for a variety of problems. BI can help
improve the performance in nearly all industries and applications.
50
Review Questions
1. Why should organizations invest in business intelligence solutions? Are
these more important than IT security solutions? Why or why not?
2. List 3 business intelligence applications in the hospitality industry.
3. Describe 2 BI tools used in your organization.
4. Businesses need a ‘two-second advantage’ to succeed. What does that
mean to you?
51
Liberty Stores Inc is a specialized global retail chain that
sells organic food, organic clothing, wellness products,
and education products to enlightened LOHAS (Lifestyles
of the Healthy and Sustainable) citizens worldwide. The
company is 20 years old, and is growing rapidly. It now
operates in 5 continents, 50 countries, 150 cities, and has
500 stores. It sells 20000 products and has 10000
employees. The company has revenues of over $5 billion
and has a profit of about 5% of revenue. The company
pays special attention to the conditions under which the
products are grown and produced. It donates about one-
fifth (20%) of its pre-tax profits from global local
charitable causes.
1: Create a comprehensive dashboard for the CEO of the

company.
2: Create another dashboard for a country head.
52

A data warehouse (DW) is an organized collection of integrated, subject-

oriented databases designed to support decision support functions. DW is
organized at the right level of granularity to provide clean enterprise-wide
data in a standardized format for reports, queries, and analysis. DW is
physically and functionally separate from an operational and transactional
database. Creating a DW for analysis and queries represents significant
investment in time and effort. It has to be constantly kept up-to-date for it to
be useful. DW offers many business and technical benefits.
DW supports business reporting and data mining activities. It can facilitate

distributed access to up-to-date business knowledge for departments and
functions, thus improving business efficiency and customer service. DW can
present a competitive advantage by facilitating decision making and helping
reform business processes.
DW enables a consolidated view of corporate data, all cleaned and organized.

Thus, the entire organization can see an integrated view of itself. DW thus
provides better and timely information. It simplifies data access and allows
end users to perform extensive analysis. It enhances overall IT performance
by not burdening the operational databases used by Enterprise Resource
Planning (ERP) and other systems.
53
Indiana University Health
(IUH), a large academic health
care system, decided to build an
enterprise data warehouse
(EDW) to foster a genuinely
data-driven management culture.
IUH hired a data warehousing
vendor to develop an EDW
which also integrates with their
Electronic Health Records
(EHR) system. They loaded 14
billion rows of data into the
EDW—fully 10 years of clinical
data from across IUH’s network.
Clinical events, patient
encounters, lab and radiology,
and other patient data were
included, as were IUH’s
performance management,
revenue cycle, and patient
satisfaction data. They soon put
in a new interactive dashboard
using the EDW that provided
IUH’s leadership with the daily
operational insights they need to
solve the quality/cost equation. It
offers visibility into key
operational metrics and trends to
easily track the performance
measures critical to controlling
costs and maintaining quality.
The EDW can easily be used
across IUH’s departments to
analyze, track and measure
clinical, financial, and patient
experience outcomes. (Source:
healthcatalyst.com)
Q1: What are the benefits of a

single large comprehensive
54
EDW?
Q2: What kinds of data would be

needed for an EDW for an
airline company?
55
The objective of DW is to provide business knowledge to support decision
making. For DW to serve its objective, it should be aligned around those
decisions. It should be comprehensive, easy to access, and up-to-date. Here
are some requirements for a good DW:

1. Subject oriented: To be effective, a DW should be designed around a

subject domain, i.e. to help solve a certain category of problems.
2. Integrated: The DW should include data from many functions that can
shed light on a particular subject area. Thus the organization can benefit
from a comprehensive view of the subject area.
3. Time-variant (time series): The data in DW should grow at daily or other

chosen intervals. That allows latest comparisons over time.
4. Nonvolatile: DW should be persistent, that is, it should not be created on

the fly from the operations databases. Thus, DW is consistently available
for analysis, across the organization and over time.
5. Summarized: DW contains rolled-up data at the right level for queries

and analysis. The process of rolling up the data helps create consistent
granularity for effective comparisons. It also helps reduces the number of
variables or dimensions of the data to make them more meaningful for
the decision makers.
6. Not normalized: DW often uses a star schema, which is a rectangular

central table, surrounded by some look-up tables. The single table view
significantly enhances speed of queries.
7. Metadata: Many of the variables in the database are computed from

other variables in the operational database. For example, total daily sales
may be a computed field. The method of its calculation for each variable
should be effectively documented. Every element in the DW should be
sufficiently well-defined.
8. Near Real-time and/or right-time (active): DWs should be updated in

near real-time in many high transaction volume industries, such as
airlines. The cost of implementing and updating DW in real time could
be discouraging though. Another downside of real-time DW is the
possibilities of inconsistencies in reports drawn just a few minutes apart.
56
57
There are two fundamentally different approaches to developing DW: top
down and bottom up. The top-down approach is to make a comprehensive
DW that covers all the reporting needs of the enterprise. The bottom-up
approach is to produce small data marts, for the reporting needs of different
departments or functions, as needed. The smaller data marts will eventually
align to deliver comprehensive EDW capabilities. The top-down approach
provides consistency but takes more time and resources. The bottom-up
approach leads to healthy local ownership and maintainability of data (Table
3.1).

Functional Data Mart Enterprise Data Warehouse

Scope One subject or functional area Complete enterprise data needs

Value Functional area reporting and insights Deeper insights connecting multiple functional areas

Target organization Decentralized management Centralized management

Time Low to medium High

Cost Low High

Size Small to medium Medium to large

Approach Bottom up Top down

Complexity Low (fewer data transformations) High (data standardization)

Technology Smaller scale servers and databases Industrial strength
Table 3.1: Comparing Data Mart and Data Warehouse
58
DW Architecture
DW has four key elements (Figure 3.1). The first element is the data sources
that provide the raw data. The second element is the process of transforming
that data to meet the decision needs. The third element is the methods of
regularly and accurately loading of that data into EDW or data marts. The
fourth element is the data access and analysis part, where devices and
applications use the data from DW to deliver insights and other benefits to
users.
Figure 3.1: Data Warehousing Architecture
59
Data Sources
Data Warehouses are created from structured data sources. Unstructured data
such as text data would need to be structured before inserted into the DW.

1. Operations data: This includes data from all business applications,

including from ERPs systems that form the backbone of an
organization’s IT systems. The data to be extracted will depend upon the
subject matter of the data warehouse. For example, for a sales/marketing
data mart, only the data about customers, orders, customer service, and
so on would be extracted.
2. Specialized applications: This includes applications such as Point of Sale

(POS) terminals, and e-commerce applications, that also provide
customer-facing data. Supplier data could come from Supply Chain
Management systems. Planning and budget data should also be added as
needed for making comparisons against targets.
3. External syndicated data: This includes publicly available data such as

weather or economic activity data. It could also be added to the DW, as
needed, to provide good contextual information to decision makers.
60
The heart of a useful DW is the processes to populate the DW with good
quality data. This is called the Extract-Transform-Load (ETL) cycle.

1. Data should be extracted from the operational (transactional) database

sources, as well as from other applications, on a regular basis.
2. The extracted data should be aligned together by key fields and
integrated into a single data set. It should be cleansed of any
irregularities or missing values. It should be rolled-up together to the
same level of granularity. Desired fields, such as daily sales totals,
should be computed. The entire data should then be brought to the same
format as the central table of DW.
3. This transformed data should then be uploaded into the DW.
This ETL process should be run at a regular frequency. Daily transaction data
can be extracted from ERPs, transformed, and uploaded to the database the
same night. Thus, the DW is up to date every morning. If a DW is needed for
near-real-time information access, then the ETL processes would need to be
executed more frequently. ETL work is usually done using automated using
programming scripts that are written, tested, and then deployed for
periodically updating the DW.
61
Star schema is the preferred data architecture for most DWs. There is a
central fact table that provides most of the information of interest. There are
lookup tables that provide detailed values for codes used in the central table.
For example, the central table may use digits to represent a sales person. The
lookup table will help provide the name for that sales person code. Here is an
example of a star schema for a data mart for monitoring sales performance
(Figure 3.2).
Figure 3.2: Star Schema Architecture for DW
Other schemas include the snowflake architecture. The difference between a

star and snowflake is that in the latter, the look-up tables can have their own
further look up tables.
There are many technology choices for developing DW. This includes
selecting the right database management system and the right set of data
management tools. There are a few big and reliable providers of DW systems.
The provider of the operational DBMS may be chosen for DW also.
Alternatively, a best-of-breed DW vendor could be used. There are also a
variety of tools out there for data migration, data upload, data retrieval, and
data analysis.
62
DW Access
Data from the DW could be accessed for many purposes, by many users,
through many devices.

1. A primary use of DW is to produce routine management and monitoring

reports. For example, a sales performance report would show sales by
many dimensions, and compared with plan. A dashboarding system will
use data from the warehouse and present analysis to users. The data from
DW can be used to populate customized performance dashboards for
executives. The dashboard could include drill-down capabilities to
analyze the performance data for root cause analysis.
2. The data from the DW could be used for ad-hoc queries and any other
applications that make use of the internal data.
3. Data from DW is used to provide data for mining purposes. Parts of the
data would be extracted, and then combined with other relevant data, for
data mining.
63
DW Best Practices
A data warehousing project reflects a significant investment into information
technology (IT). All of the best practices in implementing any IT project
should be followed.

1. The DW project should align with the corporate strategy. Top
management should be consulted for setting objectives. Financial
viability (ROI) should be established. The project must be managed by
both IT and business professionals. The DW design should be carefully
tested before beginning development work. It is often much more
expensive to redesign after development work has begun.
2. It is important to manage user expectations. The data warehouse should

be built incrementally. Users should be trained in using the system so
they can absorb the many features of the system.
3. Quality and adaptability should be built in from the start. Only relevant,
cleansed, and high-quality data should be loaded. The system should be
able to adapt to new tools for access. As business needs change, new
data marts may need to be created for new needs.
64
Conclusion
Data Warehouses are special data management facilities intended for creating
reports and analysis to support managerial decision making. They are
designed to make reporting and querying simple and efficient. The sources of
data are operational systems, and external data sources. The DW needs to be
updated with new data regularly to keep it useful. Data from DW provides a
useful input for data mining activities.
65
Review Questions
1: What is the purpose of a data warehouse?
2: What are the key elements of a data warehouse? Describe each one.
3: What are the sources and types of data for a data warehouse?
4: How will data warehousing evolve in the age of social media?
66
The Liberty Stores company wants to be fully informed about its sales of
products and take advantage of growth opportunities as they arise. It wants to
analyze sales of all its products by all store locations. The newly hired Chief
Knowledge Officer has decided to build a Data Warehouse.

1. Design a DW structure for the company to monitor its sales

performance. (Hint: Design the central table and look-up tables).
2. Design another DW for the company’s sustainability and charitable
activities.
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Data mining is the art and science of discovering knowledge, insights, and
patterns in data. It is the act of extracting useful patterns from an organized
collection of data. Patterns must be valid, novel, potentially useful, and
understandable. The implicit assumption is that data about the past can reveal
patterns of activity that can be projected into the future.
Data mining is a multidisciplinary field that borrows techniques from a

variety of fields. It utilizes the knowledge of data quality and data organizing
from the databases area. It draws modeling and analytical techniques from
statistics and computer science (artificial intelligence) areas. It also draws the
knowledge of decision-making from the field of business management.
The field of data mining emerged in the context of pattern recognition in

defense, such as identifying a friend-or-foe on a battlefield. Like many other
defense-inspired technologies, it has evolved to help gain a competitive
advantage in business.
For example, “customers who buy cheese and milk also buy bread 90 percent
of the time” would be a useful pattern for a grocery store, which can then
stock the products appropriately. Similarly, “people with blood pressure
greater than 160 and an age greater than 65 were at a high risk of dying from
a heart stroke” is of great diagnostic value for doctors, who can then focus on
treating such patients with urgent care and great sensitivity.
Past data can be of predictive value in many complex situations, especially

where the pattern may not be so easily visible without the modeling
technique. Here is a dramatic case of a data-driven decision-making system
that beats the best of human experts. Using past data, a decision tree model
was developed to predict votes for Justice Sandra Day O’Connor, who had a
swing vote in a 5–4 divided US Supreme Court. All her previous decisions
were coded on a few variables. What emerged from data mining was a simple
four-step decision tree that was able to accurately predict her votes 71 percent
of the time. In contrast, the legal analysts could at best predict correctly 59
percent of the time. (Source: Martin et al. 2004)
68
69
Target is a large retail chain that
crunches data to develop
insights that help target
marketing and advertising
campaigns. Target analysts
managed to develop a pregnancy
prediction score based on a
customer's purchasing history of
25 products. In a widely
publicized story, they figured out
that a teenage girl was pregnant
before her father did. The
targeting can be quite successful
and dramatic as this example
published in the New York Times
illustrates.
About a year after Target created

their pregnancy-prediction
model, a man walked into a
Target store and demanded to
see the manager. He was
clutching coupons that had been
sent to his daughter and he was
angry, according to an employee
who participated in the
conversation. “My daughter got
this in the mail!” he said. “She’s
still in high school, and you’re
sending her coupons for baby
clothes and cribs? Are you trying
to encourage her to get
pregnant?”
The manager didn’t have any

idea what the man was talking
about. He looked at the mailer.
Sure enough, it was addressed to
the man’s daughter and
contained advertisements for
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maternity clothing, nursery
furniture and pictures of smiling
infants. The manager apologized
and then called a few days later
to apologize again.
On the phone, though, the father

was somewhat subdued. “I had a
talk with my daughter,” he said.
“It turns out there’s been some
activities in my house I haven’t
been completely aware of. I owe
you an apology.” (Source: New
York Times).
1: Do Target and other retailers

have full rights to use their
acquired data as it sees fit, and
to contact desired consumers
with all legally admissible means
and messages? What are the
issues involved here?
2: FaceBook and Google provide

many services for free. In return
they mine our email and blogs
and send us targeted ads. Is that
a fair deal?
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The total amount of data in the world is doubling every 18 months. There is
an ever-growing avalanche of data coming with higher velocity, volume, and
variety. One has to quickly use it or lose it. Smart data mining requires
choosing where to play. One has to make judicious decisions about what to
gather and what to ignore, based on the purpose of the data mining exercises.
It is like deciding where to fish; as not all streams of data will be equally rich
in potential insights.
To learn from data, quality data needs to be effectively gathered, cleaned and
organized, and then efficiently mined. One requires the skills and
technologies for consolidation and integration of data elements from many
sources. Most organizations develop an enterprise data model (EDM) to
organize their data. An EDM is a unified, high-level model of all the data
stored in an organization’s databases. The EDM is usually inclusive of the
data generated from all internal systems. The EDM provides the basic menu
of data to create a data warehouse for a particular decision-making purpose.
DWs help organize all this data in an easy and usable manner so that it can be
selected and deployed for mining. The EDM can also help imagine what
relevant external data should be gathered to provide context and develop good
predictive relationships with the internal data. In the United States, the
various federal and local governments and their regulatory agencies make a
vast variety and quantity of data available at data.gov.
Gathering and curating data takes time and effort, particularly when it is
unstructured or semistructured. Unstructured data can come in many forms
like databases, blogs, images, videos, audio, and chats. There are streams of
unstructured social media data from blogs, chats, and tweets. There are
streams of machine-generated data from connected machines, RFID tags, the
internet of things, and so on. Eventually the data should be rectangularized,
that is, put in rectangular data shapes with clear columns and rows, before
submitting it to data mining.
Knowledge of the business domain helps select the right streams of data for
pursuing new insights. Only the data that suits the nature of the problem being
solved should be gathered. The data elements should be relevant, and suitably
address the problem being solved. They could directly impact the problem, or
they could be a suitable proxy for the effect being measured. Select data could
also be gathered from the data warehouse. Every industry and function will
have its own requirements and constraints. The health care industry will
provide a different type of data with different data names. The HR function
72
would provide different kinds of data. There would be different issues of
quality and privacy for these data.
73
The quality of data is critical to the success and value of the data mining
project. Otherwise, the situation will be of the kind of garbage in and garbage
out (GIGO). The quality of incoming data varies by the source and nature of
data. Data from internal operations is likely to be of higher quality, as it will
be accurate and consistent. Data from social media and other public sources is
less under the control of business, and is less likely to be reliable.
Data almost certainly needs to be cleansed and transformed before it can be

used for data mining. There are many ways in what data may need to be
cleansed – filling missing values, reigning in the effects of outliers,
transforming fields, binning continuous variables, and much more – before it
can be ready for analysis. Data cleansing and preparation is a labor-intensive
or semi-automated activity that can take up to 60-70% of the time needed for
a data mining project.

1. Duplicate data needs to be removed. The same data may be received

from multiple sources. When merging the data sets, data must be de-
duped.
2. Missing values need to be filled in, or those rows should be removed
from analysis. Missing values can be filled in with average or modal or
default values.
3. Data elements should be comparable. They may need to be (a)
transformed from one unit to another. For example, total costs of health
care and the total number of patients may need to be reduced to
cost/patient to allow comparability of that value. Data elements may
need to be adjusted to make them (b) comparable over time also. For
example, currency values may need to be adjusted for inflation; they
would need to be converted to the same base year for comparability.
They may need to be converted to a common currency. Data should be
(c) stored at the same granularity to ensure comparability. For example,
sales data may be available daily, but the sales person compensation data
may only be available monthly. To relate these variables, the data must
be brought to the lowest common denominator, in this case, monthly.
4. Continuous values may need to be binned into a few buckets to help with
some analyses. For instance, work experience could be binned as low,
medium, and high.
5. Outlier data elements need to be removed after careful review, to avoid
the skewing of results. For example, one big donor could skew the
analysis of alumni donors in an educational setting.
74
6. Ensure that the data is representative of the phenomena under analysis
by correcting for any biases in the selection of data. For example, if the
data includes many more members of one gender than is typical of the
population of interest, then adjustments need to be applied to the data.
7. Data may need to be selected to increase information density. Some data
may not show much variability, because it was not properly recorded or
for other reasons. This data may dull the effects of other differences in
the data and should be removed to improve the information density of
the data.
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Data mining techniques can serve different types of objectives. The outputs of
data mining will reflect the objective being served. There are many ways of
representing the outputs of data mining.
One popular form of data mining output is a decision tree. It is a

hierarchically branched structure that helps visually follow the steps to make
a model-based decision. The tree may have certain attributes, such as
probabilities assigned to each branch. A related format is a set of business
rules, which are if-then statements that show causality. A decision tree can be
mapped to business rules. If the objective function is prediction, then a
decision tree or business rules are the most appropriate mode of representing
the output.
The output can be in the form of a regression equation or mathematical

function that represents the best fitting curve to represent the data. This
equation may include linear and nonlinear terms. Regression equations are a
good way of representing the output of classification exercises. These are also
a good representation of forecasting formulae.
Population “centroid” is a statistical measure for describing central tendencies

of a collection of data points. These might be defined in a multidimensional
space. For example, a centroid could be “middle-aged, highly educated, high-
net worth professionals, married with two children, living in the coastal
areas”. Or a population of “20-something, ivy-league-educated, tech
entrepreneurs based in Silicon Valley”. Or it could be a collection of “vehicles
more than 20 years old, giving low mileage per gallon, which failed
environmental inspection”. These are typical representations of the output of a
cluster analysis exercise.
Business rules are an appropriate representation of the output of a market

basket analysis exercise. These rules are if-then statements with some
probability parameters associated with each rule. For example, those that buy
milk and bread will also buy butter (with 80 percent probability).
The output can be in the form of a regression equation or mathematical

function that represents the best fitting curve to represent the data. This
equation may include linear and non-linear terms. Regression equations are a
good way of representing the output of classification exercises. These are also
a good representation of forecasting formulae.
Population ‘centroid’ is a statistical measure for describing central tendencies
76
of a collection of data points. These might be defined in a multi-dimensional
space. For example, a centroid could be “middle-aged, highly educated, high-
net worth professionals, married with 2 children, living in the coastal areas”.
Or a population of “20-something, ivy-league-educated, tech entrepreneurs
based in Silicon Valley”. Or a collection of “vehicles more than 20 years old,
giving low mileage per gallon, that failed the environmental inspection”.
These are typical representations of the output of a cluster analysis exercise.
Business rules are an appropriate representation of the output of a market-

basket analysis exercise. These rules are if-then statements with some
probability parameters associated with each rule. For example, those that buy
milk and bread, will also buy butter (with 80% probability).
77
There are two primary kinds of data mining processes: supervised learning
and unsupervised learning. In supervised learning, a decision model can be
created using past data, and the model can then be used to predict the correct
answer for future data instances. Classification is the main category of
supervised learning activity. There are many techniques for classification,
decision trees being the most popular one. Each of these techniques can be
implemented with many algorithms. A common metric for all of classification
techniques is predictive accuracy.
Predictive Accuracy = (Correct Predictions) / Total Predictions
Suppose a data mining project has been initiated to develop a predictive

model for cancer patients using a decision tree. Using a relevant set of
variables and data instances, a decision tree model has been created. The
model is then used to predict other data instances. When a true positive data
point is positive, that is a correct prediction, called a true positive (TP).
Similarly, when a true negative data point is classified as negative, that is a
true negative (TN). On the other hand, when a true-positive data point is
classified by the model as negative, that is an incorrect prediction, called a
false negative (FN). Similarly, when a true-negative data point is classified as
positive, that is classified as a false positive (FP). This is represented using
the confusion matrix (Figure 4.1).

True Class
ConfusionMatrix
Positive Negative

Positive True Positive (TP) False Positive (FP)
Predicted Class

Predicted class
Negative False Negative (FN) True Negative (TN)
Figure 4.1: Confusion Matrix
Thus the predictive accuracy can be specified by the following formula.
Predictive Accuracy = (TP +TN) / (TP + TN + FP + FN).
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All classification techniques have a predictive accuracy associated with a
predictive model. The highest value can be 100%. In practice, predictive
models with more than 70% accuracy can be considered usable in business
domains, depending upon the nature of the business.
There are no good objective measures to judge the accuracy of unsupervised

learning techniques such as Cluster Analysis. There is no single right answer
for the results of these techniques. For example, the value of the segmentation
model depends upon the value the decision-maker sees in those results.
79
Data may be mined to help make more efficient decisions in the future. Or it
may be used to explore the data to find interesting associative patterns. The
right technique depends upon the kind of problem being solved (Figure 4.2).


Decision Trees
Supervised Learning
(Predictive ability based on past data) Classification – Machine Learning
Neural Networks

Classification - Statistics Regression

Unsupervised Learning Clustering Analysis
(Exploratory analysis to discover patterns)
Association Rules
Figure 4.2: Important Data Mining Techniques
The most important class of problems solved using data mining are
classification problems. Classification techniques are called supervised
learning as there is a way to supervise whether the model is providing the
right or wrong answers. These are problems where data from past decisions is
mined to extract the few rules and patterns that would improve the accuracy
of the decision making process in the future. The data of past decisions is
organized and mined for decision rules or equations, that are then codified to
produce more accurate decisions.
Decision trees are the most popular data mining technique, for many reasons.

1. Decision trees are easy to understand and easy to use, by analysts as well
as executives. They also show a high predictive accuracy.
2. Decision trees select the most relevant variables automatically out of all
the available variables for decision making.
3. Decision trees are tolerant of data quality issues and do not require much
80
data preparation from the users.
4. Even non-linear relationships can be handled well by decision trees.
There are many algorithms to implement decision trees. Some of the popular
ones are C5, CART and CHAID.
Regression is a most popular statistical data mining technique. The goal of

regression is to derive a smooth well-defined curve to best the data.
Regression analysis techniques, for example, can be used to model and
predict the energy consumption as a function of daily temperature. Simply
plotting the data may show a non-linear curve. Applying a non-linear
regression equation will fit the data very well with high accuracy. Once such a
regression model has been developed, the energy consumption on any future
day can be predicted using this equation. The accuracy of the regression
model depends entirely upon the dataset used and not at all on the algorithm
or tools used.
Artificial Neural Networks (ANN) is a sophisticated data mining technique

from the Artificial Intelligence stream in Computer Science. It mimics the
behavior of human neural structure: Neurons receive stimuli, process them,
and communicate their results to other neurons successively, and eventually a
neuron outputs a decision. A decision task may be processed by just one
neuron and the result may be communicated soon. Alternatively, there could
be many layers of neurons involved in a decision task, depending upon the
complexity of the domain. The neural network can be trained by making a
decision over and over again with many data points. It will continue to learn
by adjusting its internal computation and communication parameters based on
feedback received on its previous decisions. The intermediate values passed
within the layers of neurons may not make any intuitive sense to an observer.
Thus, the neural networks are considered a black-box system.
At some point, the neural network will have learned enough and begin to
match the predictive accuracy of a human expert or alternative classification
techniques. The predictions of some ANNs that have been trained over a long
period of time with a large amount of data have become decisively more
accurate than human experts. At that point, the ANNs can begin to be
seriously considered for deployment, in real situations in real time. ANNs are
popular because they are eventually able to reach a high predictive accuracy.
ANNs are also relatively simple to implement and do not have any issues with
data quality. However, ANNs require a lot of data to train it to develop good
predictive ability.
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Cluster Analysis is an exploratory learning technique that helps in identifying
a set of similar groups in the data. It is a technique used for automatic
identification of natural groupings of things. Data instances that are similar to
(or near) each other are categorized into one cluster, while data instances that
are very different (or far away) from each other are categorized into separate
clusters. There can be any number of clusters that could be produced by the
data. The K-means technique is a popular technique and allows the user
guidance in selecting the right number (K) of clusters from the data.
Clustering is also known as the segmentation technique. It helps divide and

conquer large data sets. The technique shows the clusters of things from past
data. The output is the centroids for each cluster and the allocation of data
points to their cluster. The centroid definition is used to assign new data
instances can be assigned to their cluster homes. Clustering is also a part of
the artificial intelligence family of techniques.
Association rules are a popular data mining method in business, especially

where selling is involved. Also known as market basket analysis, it helps in
answering questions about cross-selling opportunities. This is the heart of the
personalization engine used by ecommerce sites like Amazon.com and
streaming movie sites like Netflix.com. The technique helps find interesting
relationships (affinities) between variables (items or events). These are
represented as rules of the form X ® Y, where X and Y are sets of data items.
A form of unsupervised learning, it has no dependent variable; and there are
no right or wrong answers. There are just stronger and weaker affinities.
Thus, each rule has a confidence level assigned to it. A part of the machine
learning family, this technique achieved legendary status when a fascinating
relationship was found in the sales of diapers and beers.
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Data Mining tools have existed for many decades. However, they have
recently become more important as the values of data have grown and the
field of big data analytics has come into prominence. There are a wide range
of data mining platforms available in the market today.

1. Simple or sophisticated: There are simple end-user data mining tools

such as MS Excel, and there are more sophisticated tools such as IBM
SPSS Modeler.
2. Stand-alone or Embedded: There are stand alone tools and there are tools
embedded in an existing transaction processing or data warehousing or
ERP system.
3. Open source or Commercial: There are open source and freely available
tools such as Weka, and there are commercial products.
4. User interface: There are text-based tools that require some
programming skills, and there are GUI-based drag-and-drop format
tools.
5. Data formats: There are tools that work only on proprietary data formats
and there are those directly accept data from a host of popular data
management tools formats.
Here we compare three platforms that we have used extensively and

effectively for many data mining projects.
Table 4.1: Comparison of Popular Data Mining Platforms

Feature Excel IBM SPSS Modeler Weka

Ownership Commercial Commercial, expensive Open-source, free

Data Mining Limited; extensible with add-on Extensive features, unlimited Extensive, performance issues with
Features modules data sizes large data

Stand-alone Stand-alone Embedded in BI software suites Stand-alone

User skills End-users For skilled BI analysts Skilled BI analysts
needed
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User interface Text and click, Easy Drag & Drop use, colorful, GUI, mostly b&w text output
beautiful GUI

Data formats Industry-standard Variety of data sources accepted Proprietary
MS Excel is a relatively simple and easy data mining tool. It can get quite
versatile once Analyst Pack and some other add-on products are installed on
it.
IBM’s SPSS Modeler is an industry-leading data mining platform. If offers a

powerful set of tools and algorithms for most popular data mining
capabilities. It has colorful GUI format with drag-and-drop capabilities. It can
accept data in multiple formats including reading Excel files directly.
Weka is an open-source GUI based tool that offers a large number of data
mining algorithms.
ERP systems include some data analytic capabilities, too. SAP has its
Business Objects (BO) software. BO is considered one of the leading BI
suites in the industry, and is often used by organizations that use SAP.
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Effective and successful use of data mining activity requires both business
and technology skills. The business aspects help understand the domain and
the key questions. It also helps one imagine possible relationships in the data,
and create hypotheses to test it. The IT aspects help fetch the data from many
sources, clean up the data, assemble it to meet the needs of the business
problem, and then run the data mining techniques on the platform.
An important element is to go after the problem iteratively. It is better to

divide and conquer the problem with smaller amounts of data, and get closer
to the heart of the solution in an iterative sequence of steps. There are several
best practices learned from the use of data mining techniques over a long
period of time. The Data Mining industry has proposed a Cross-Industry
Standard Process for Data Mining (CRISP-DM). It has six essential steps
(Figure 4.3):
Figure 4.3: CRISP-DM Data Mining cycle

1. Business Understanding: The first and most important step in data

mining is asking the right business questions. A question is a good one if
answering it would lead to large payoffs for the organization, financially
and otherwise. In other words, selecting a data mining project is like any
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other project, in that it should show strong payoffs if the project is
successful. There should be strong executive support for the data mining
project, which means that the project aligns well with the business
strategy. A related important step is to be creative and open in proposing
imaginative hypotheses for the solution. Thinking outside the box is
important, both in terms of a proposed model as well in the data sets
available and required.
2. Data Understanding: A related important step is to understand the data
available for mining. One needs to be imaginative in scouring for many
elements of data through many sources in helping address the hypotheses
to solve a problem. Without relevant data, the hypotheses cannot be
tested.
3. Data Preparation: The data should be relevant, clean and of high quality.
It’s important to assemble a team that has a mix of technical and business
skills, who understand the domain and the data. Data cleaning can take
60-70% of the time in a data mining project. It may be desirable to
continue to experiment and add new data elements from external sources
of data that could help improve predictive accuracy.
4. Modeling: This is the actual task of running many algorithms using the
available data to discover if the hypotheses are supported. Patience is
required in continuously engaging with the data until the data yields
some good insights. A host of modeling tools and algorithms should be
used. A tool could be tried with different options, such as running
different decision tree algorithms.
5. Model Evaluation: One should not accept what the data says at first. It is
better to triangulate the analysis by applying multiple data mining
techniques, and conducting many what-if scenarios, to build confidence
in the solution. One should evaluate and improve the model’s predictive
accuracy with more test data. When the accuracy has reached some
satisfactory level, then the model should be deployed.
6. Dissemination and rollout: It is important that the data mining solution is
presented to the key stakeholders, and is deployed in the organization.
Otherwise the project will be a waste of time and will be a setback for
establishing and supporting a data-based decision-process culture in the
organization. The model should be eventually embedded in the
organization’s business processes.
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There are many myths about this area, scaring away many business
executives from using data mining. Data Mining is a mindset that presupposes
a faith in the ability to reveal insights. By itself, data mining is not too hard,
nor is it too easy. It does require a disciplined approach and some cross-
disciplinary skills.
Myth #1: Data Mining is about algorithms. Data mining is used by business
to answer important and practical business questions. Formulating the
problem statement correctly and identifying imaginative solutions for testing
are far more important before the data mining algorithms gets called in.
Understanding the relative strengths of various algorithms is helpful but not
mandatory.
Myth #2: Data Mining is about predictive accuracy. While important,

predictive accuracy is a feature of the algorithm. As in myth#1, the quality of
output is a strong function of the right problem, right hypothesis, and the right
data.
Myth #3: Data Mining requires a data warehouse. While the presence of a
data warehouse assists in the gathering of information, sometimes the creation
of the data warehouse itself can benefit from some exploratory data mining.
Some data mining problems may benefit from clean data available directly
from the DW, but a DW is not mandatory.
Myth #4: Data Mining requires large quantities of data. Many interesting data
mining exercises are done using small or medium sized data sets, at low costs,
using end-user tools.
Myth #5: Data Mining requires a technology expert. Many interesting data
mining exercises are done by end-users and executives using simple everyday
tools like spreadsheets.
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Data mining is an exercise in extracting non-trivial useful patterns in the data.
It requires a lot of preparation and patience to pursue the many leads that data
may provide. Much domain knowledge, tools and skill is required to find such
patterns. Here are some of the more common mistakes in doing data mining,
and should be avoided.
Mistake #1: Selecting the wrong problem for data mining: Without the right
goals or having no goals, data mining leads to a waste of time. Getting the
right answer to an irrelevant question could be interesting, but it would be
pointless from a business perspective. A good goal would be one that would
deliver a good ROI to the organization.
Mistake #2: Buried under mountains of data without clear metadata: It is

more important to be engaged with the data, than to have lots of data. The
relevant data required may be much less than initially thought. There may be
insufficient knowledge about the data, or metadata. Examine the data with a
critical eye and do not naively believe everything you are told about the data.
Mistake #3: Disorganized data mining: Without clear goals, much time is
wasted. Doing the same tests using the same mining algorithms repeatedly
and blindly, without thinking about the next stage, without a plan, would lead
to wasted time and energy. This can come from being sloppy about keeping
track of the data mining procedure and results. Not leaving sufficient time for
data acquisition, selection and preparation can lead to data quality issues, and
GIGO. Similarly not providing enough time for testing the model, training the
users and deploying the system can make the project a failure.
Mistake #4: Insufficient business knowledge: Without a deep understanding of

the business domain, the results would be gibberish and meaningless. Don’t
make erroneous assumptions, courtesy of experts. Don’t rule out anything
when observing data analysis results. Don’t ignore suspicious (good or bad)
findings and quickly move on. Be open to surprises. Even when insights
emerge at one level, it is important to slice and dice the data at other levels to
see if more powerful insights can be extracted.
Mistake #5: Incompatibility of data mining tools and datasets. All the tools
from data gathering, preparation, mining, and visualization, should work
together. Use tools that can work with data from multiple sources in multiple
industry standard formats.
Mistake #6: Looking only at aggregated results and not at individual
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records/predictions. It is possible that the right results at the aggregate level
provide absurd conclusions at an individual record level. Diving into the data
at the right angle can yield insights at many levels of data.
Mistake #7: Not measuring your results differently from the way your sponsor
measures them. If the data mining team loses its sense of business objectives,
and beginning to mine data for its own sake, it will lose respect and executive
support very quickly. The BIDM cycle (Figure 1.1) should be remembered.
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Conclusion
Data Mining is like diving into the rough material to discover a valuable
finished nugget. While the technique is important, domain knowledge is also
important to provide imaginative solutions that can then be tested with data
mining. The business objective should be well understood and should always
be kept in mind to ensure that the results are beneficial to the sponsor of the
exercise.
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Review Questions
1. What is data mining? What are supervised and unsupervised learning
techniques?
2. Describe the key steps in the data mining process. Why is it important to
follow these processes?
3. What is a confusion matrix?
4. Why is data preparation so important and time consuming?
5. What are some of the most popular data mining techniques?
6. What are the major mistakes to be avoided when doing data mining?
7. What are the key requirements for a skilled data analyst?
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Liberty is constantly evaluating opportunities for
improving efficiencies in all its operations, including the
commercial operations as well its charitable activities.

1. What data mining techniques would you use to analyze and predict sales
patterns?
2. What data mining technique would you use to categorize its customers
92

Data Visualization is the art and science of making data easy to understand
and consume, for the end user. Ideal visualization shows the right amount of
data, in the right order, in the right visual form, to convey the high priority
information. The right visualization requires an understanding of the
consumer’s needs, nature of the data, and the many tools and techniques
available to present data. The right visualization arises from a complete
understanding of the totality of the situation. One should use visuals to tell a
true, complete and fast-paced story.
Data visualization is the last step in the data life cycle. This is where the data
is processed for presentation in an easy-to-consume manner to the right
audience for the right purpose. The data should be converted into a language
and format that is best preferred and understood by the consumer of data. The
presentation should aim to highlight the insights from the data in an
actionable manner. If the data is presented in too much detail, then the
consumer of that data might lose interest and the insight.
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Dr. Hans Rosling is a master at data visualization. He has
perfected the art of showing data in novel ways to
highlight unexpected truths. He has become an online star
by using data visualizations to make serious points about
global health policy and development. Using novel ways
to illustrate data obtained from UN agencies, he has
helped demonstrate the progress that the world has made
in improving public health on many dimensions. The best
way to grasp the power of his work is to click here to see
this TED video, where Life Expectancy is mapped along
with Fertility Rate for all countries from 1962 to 2003.
Figure 5.1 shows a one graphic from this video.
Figure 5.1: Visualizing Global Health Data (source: ted.com)
“THE biggest myth is that if we save all the poor kids, we

will destroy the planet,” says Hans Rosling, a doctor and
professor of international health at the Karolinska
Institute in Sweden. “But you can't stop population
growth by letting poor children die.” He has the
computerised graphs to prove it: colourful visuals with
circles that swarm, swell and shrink like living creatures.
Dr Rosling's mesmerizing graphics have been impressing
audiences on the international lecture circuit, from the
TED conferences to the World Economic Forum at Davos.
Instead of bar charts and histograms, Dr Rosling uses
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Lego bricks, IKEA boxes and data-visualization software
developed by his Gapminder Foundation to transform
reams of economic and public-health data into gripping
stories. His aim is ambitious. “I produce a road map for
the modern world,” he says. “Where people want to drive
is up to them. But I have the idea that if they have a
proper road map and know what the global realities are,
they'll make better decisions.” (source: economist.com).
Q1: What are the business and social implications of this kind of data visualization?
Q2: How could these techniques be applied in your organization and area of work?
95
Data can be presented in the form of rectangular tables, or it can be presented
in colorful graphs of various types. “Small, non-comparative, highly-labeled
data sets usually belong in tables” – (Ed Tufte, 2001, p 33). However, as the
amount of data grows, graphs are preferable. Graphics help give shape to
data. Tufte, a pioneering expert on data visualization, presents the following
objectives for graphical excellence:

1. Show, and even reveal, the data: The data should tell a story, especially a
story hidden in large masses of data. However, reveal the data in context,
so the story is correctly told.
2. Induce the viewer to think of the substance of the data: The format of the
graph should be so natural to the data, that it hides itself and lets data
shine.
3. Avoid distorting what the data have to say: Statistics can be used to lie.
In the name of simplifying, some crucial context could be removed
leading to distorted communication.
4. Make large data sets coherent: By giving shape to data, visualizations
can help bring the data together to tell a comprehensive story.
5. Encourage the eyes to compare different pieces of data: Organize the
chart in ways the eyes would naturally move to derive insights from the
graph.
6. Reveal the data at several levels of detail: Graphs leads to insights,
which raise further curiosity, and thus presentations should help get to
the root cause.
7. Serve a reasonably clear purpose – informing or decision-making.
8. Closely integrate with the statistical and verbal descriptions of the
dataset: There should be no separation of charts and text in presentation.
Each mode should tell a complete story. Intersperse text with the
map/graphic to highlight the main insights.
Context is important in interpreting graphics. Perception of the chart is as

important as the actual charts. Do not ignore the intelligence or the biases of
the reader. Keep the template consistent, and only show variations in data.
There can be many excuses for graphical distortion. E.g. “we are just
approximating.” Quality of information transmission comes prior to aesthetics
of chart. Leaving out the contextual data can be misleading.
A lot of graphics are published because they serve a particular cause or a

point of view. It is particularly important when in a for-profit or politically
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contested environments. Many related dimensions can be folded into a graph.
The more the dimensions that are represented in a graph, the richer and more
useful the chart become. The data visualizer should understand the client’s
objects and present the data for accurate perception of the totality of the
situation.
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Types of Charts
There are many kinds of data as seen in the caselet above. Time series data is
the most popular form of data. It helps reveal patterns over time. However,
data could be organized around alphabetical list of things, such as countries or
products or salespeople. Figure 5.2 shows some of the popular chart types and
their usage.

1. Line graph. This is a basic and most popular type of displaying

information. It shows data as a series of points connected by straight line
segments. If mining with time-series data, time is usually shown on the
x-axis. Multiple variables can be represented on the same scale on y-axis
to compare of the line graphs of all the variables.
2. Scatter plot: This is another very basic and useful graphic form. It helps
reveal the relationship between two variables. In the above caselet, it
shows two dimensions: Life Expectancy and Fertility Rate. Unlike in a
line graph, there are no line segments connecting the points.
3. Bar graph: A bar graph shows thin colorful rectangular bars with their
lengths being proportional to the values represented. The bars can be
plotted vertically or horizontally. The bar graphs use a lot of more ink
than the line graph and should be used when line graphs are inadequate.
4. Stacked Bar graphs: These are a particular method of doing bar graphs.
Values of multiple variables are stacked one on top of the other to tell an
interesting story. Bars can also be normalized such as the total height of
every bar is equal, so it can show the relative composition of each bar.
5. Histograms: These are like bar graphs, except that they are useful in
showing data frequencies or data values on classes (or ranges) of a
numerical variable.
98
Figure 5.1: Many types of graphs

6. Pie charts: These are very popular to show the distribution of a variable,
such as sales by region. The size of a slice is representative of the
relative strengths of each value.
7. Box charts: These are special form of charts to show the distribution of
variables. The box shows the middle half of the values, while whiskers
on both sides extend to the extreme values in either direction.
8. Bubble Graph: This is an interesting way of displaying multiple
dimensions in one chart. It is a variant of a scatter plot with many data
points marked on two dimensions. Now imagine that each data point on
the graph is a bubble (or a circle) … the size of the circle and the color
fill in the circle could represent two additional dimensions.
9. Dials: These are charts like the speed dial in the car, that shows whether
the variable value (such as sales number) is in the low range, medium
range, or high range. These ranges could be colored red, yellow and gree
to give an instant view of the data.
10. Geographical Data maps are particularly useful maps to denote

statistics. Figure 5.3 shows a tweet density map of the US. It shows
where the tweets emerge from in the US.
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Figure 5.3: US tweet map (Source: Slate.com)

11. Pictographs: One can use pictures to represent data. E.g. Figure 5.2

shows the number of liters of water needed to produce one pound of each
of the products, where images are used to show the product for easy
reference. Each droplet of water also represents 50 liters of water.
Figure 5.4: Pictograph of Water footprint (source : waterfootprint.org)
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To demonstrate how each of the visualization tools could be used, imagine an
executive for a company who wants to analyze the sales performance of his
division. Figure 5.1 show the important raw sales data for the current year,
alphabetically sorted by Product names.

Product Revenue Orders SalesPers

AA 9731 131 23

BB 355 43 8

CC 992 32 6

DD 125 31 4

EE 933 30 7

FF 676 35 6

GG 1411 128 13

HH 5116 132 38

JJ 215 7 2

KK 3833 122 50

LL 1348 15 7

MM 1201 28 13
Table 5.1: Raw Performance Data
To reveal some meaningful pattern, a good first step would be to sort the table
by Product revenue, with highest revenue first. We could total up the values
of Revenue, Orders, and Sales persons for all products. We can also add some
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important ratios to the right of the table (Table 5.2).

Product Revenue Orders SalesPers Rev/Order Rev/SalesP Orders/SalesP

AA 9731 131 23 74.3 423.1 5.7

HH 5116 132 38 38.8 134.6 3.5

KK 3833 122 50 31.4 76.7 2.4

GG 1411 128 13 11.0 108.5 9.8

LL 1348 15 7 89.9 192.6 2.1

MM 1201 28 13 42.9 92.4 2.2

CC 992 32 6 31.0 165.3 5.3

EE 933 30 7 31.1 133.3 4.3

FF 676 35 6 19.3 112.7 5.8

BB 355 43 8 8.3 44.4 5.4

JJ 215 7 2 30.7 107.5 3.5

DD 125 31 4 4.0 31.3 7.8

Total 25936 734 177 35.3 146.5 4.1
Table 5.2: Sorted data, with additional ratios
There are too many numbers on this table to visualize any trends in them. The
numbers are in different scales so plotting them on the same chart would not
be easy. E.g. the Revenue numbers are in thousands while the SalesPers
numbers and Orders/SalesPers are in the single or double digit.
One could start by visualizing the revenue as a pie-chart. The revenue
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proportion drops significantly from the first product to the next. (Figure 5.5).
It is interesting to note that the top 3 products produce almost 75% of the
revenue.
Figure 5.5: Revenue Share by Product
The number of orders for each product can be plotted as a bar graph (Figure
5.2). This shows that while the revenue is widely different for the top four
products, they have approximately the same number of orders.
Figure 5.6: Orders by Products

Therefore, the orders data could be investigated further to see order patterns.
Suppose additional data is made available for Orders by their size. Suppose
the orders are chunked into 4 sizes: Tiny, Small, Medium, and Large.
Additional data is shown in Table 5.3.
103

Product Total Orders Tiny Small Medium Large

AA 131 5 44 70 12

HH 132 38 60 30 4

KK 122 20 50 44 8

GG 128 52 70 6 0

LL 15 2 3 5 5

MM 28 8 12 6 2

CC 32 5 17 10 0

EE 30 6 14 10 0

FF 35 10 22 3 0

BB 43 18 25 0 0

JJ 7 4 2 1 0

DD 31 21 10 0 0

Total 734 189 329 185 31
Table 5.3: Additional data on order sizes
Figure 5.7 is a stacked bar graph that shows the percentage of Orders by size
for each product. This chart (Figure 5.7) brings a different set of insights. It
shows that the product HH has a larger proportion of tiny orders. The
products at the far right have a large number of tiny orders and very few large
orders.
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Figure 5.7: Product Orders by Order Size
105
The executive wants to understand the productivity of salespersons. This
analysis could be done both in terms of the number of orders, or revenue, per
salesperson. There could be two separate graphs, one for the number of orders
per salesperson, and the other for the revenue per salesperson. However, an
interesting way is to plot both measures on the same graph to give a more
complete picture. This can be done even when the two data have different
scales. The data is here resorted by number of orders per salesperson.
Figure 5.8 shows two line graphs superimposed upon each other. One line
shows the revenue per salesperson, while the other shows the number of
orders per salesperson. It shows that the highest productivity of 5.3 orders per
sales person, down to 2.1 orders per salesperson. The second line, the blue
line shows the revenue per sales person for each for the products. The revenue
per salesperson is highest at 630, while it is lowest at just 30.
And thus additional layers of data visualization can go on for this data set.
Figure 5.8: Salesperson productivity by product
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To help the client in understanding the situation, the following considerations
are important:

1. Fetch appropriate and correct data for analysis. This requires some
understanding of the domain of the client and what is important for the
client. E.g. in a business setting, one may need to understand the many
measure of profitability and productivity.
2. Sort the data in the most appropriate manner. It could be sorted by
numerical variables, or alphabetically by name.
3. Choose appropriate method to present the data. The data could be
presented as a table, or it could be presented as any of the graph types.
4. The data set could be pruned to include only the more significant
elements. More data is not necessarily better, unless it makes the most
significant impact on the situation.
5. The visualization could show additional dimension for reference such as
the expectations or targets with which to compare the results.
6. The numerical data may need to be binned into a few categories. E.g. the
orders per person were plotted as actual values, while the order sizes
were binned into 4 categorical choices.
7. High-level visualization could be backed by more detailed analysis. For
the most significant results, a drill-down may be required.
8. There may be need to present additional textual information to tell the
whole story. For example, one may require notes to explain some
extraordinary results.

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Conclusion
Data Visualization is the last phase of the data lifecycle, and leads to the consumption of data by the end user. It should tell an
accurate, complete and simple story backed by date, while keeping it insightful and engaging. There are innumerable types of
visual graphing techniques available for visualizing data. The choice of the right tools requires a good understanding of the
business domain, the data set and the client needs. There is ample room for creativity to design ever more compelling data
visualization to most efficiently convey the insights from the data.
108
Review Questions
1. What is data visualization?
2. How would you judge the quality of data visualizations?
3. What are the data visualization techniques? When would you use tables
or graphs?
4. Describe some key steps in data visualization.
5. What are some key requirements for good visualization.
109
Liberty is constantly evaluating its performance for
improving efficiencies in all its operations, including the
commercial operations as well its charitable activities.

1. What data visualization techniques would you use to help understand
sales patterns?
2. What data visualization technique would you use to categorize its
customers?
110
Section 2

This section covers five important data mining techniques.
The first three techniques are examples of supervised learning, consisting of classification techniques.
Chapter 6 will cover decision trees, which are the most popular form of data
mining techniques. There are many algorithms to develop decision trees.
Chapter 7 will describe regression modeling techniques. These are statistical

techniques.
Chapter 8 will cover artificial neural networks, which are a machine learning
technique.
The next two techniques are examples of unsupervised learning, consisting of data exploration techniques.
Chapter 9 will cover Cluster Analysis. This is also called Market

Segmentation analysis.
Chapter 10 will cover the Association Rule Mining technique, also called
Market Basket Analysis.

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Decision trees are a simple way to guide one’s path to a decision. The
decision may be a simple binary one, whether to approve a loan or not. Or it
may be a complex multi-valued decision, as to what may be the diagnosis for
a particular sickness. Decision trees are hierarchically branched structures that
help one come to a decision based on asking certain questions in a particular
sequence. Decision trees are one of the most widely used techniques for
classification. A good decision tree should be short and ask only a few
meaningful questions. They are very efficient to use, easy to explain, and their
classification accuracy is competitive with other methods. Decision trees can
generate knowledge from a few test instances that can then be applied to a
broad population. Decision trees are used mostly to answer relatively simple
binary decisions.
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A study was done at UC San
Diego concerning heart disease
patient data. The patients were
diagnosed with a heart attack
from chest pain, diagnosed by
EKG, high enzyme levels in their
heart muscles, etc. The objective
was to predict which of these
patients was at risk of dying from
a second heart attack within the
next 30 days. The prediction
would determine the treatment
plan, such as whether to keep the
patient in intensive care or not.
For each patient more than 100
variables were collected,
including demographics,
medical history and lab data.
Using that data, and the CART
algorithm, a decision tree was
constructed.
The decision tree showed that if

Blood Pressure was low (<=90),
the chance of another heart
attack was very high (70%). If
the patient’s BP was ok, the next
question to ask was the patient’s
age. If the age was low (<=62),
then the patient’s survival was
almost guaranteed (98%). If the
age was higher, then the next
question to ask was about sinus
problems. If their sinus was ok,
the chances of survival were
89%. Otherwise, the chance of
survival dropped to 50%. This
decision tree predicts 86.5% of
the cases correctly. (Source:
Salford Systems).
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1: Is a decision tree good enough

in terms of accuracy, design,
readability, for this data etc.
2: Identify the benefits from

creating such a decision tree.
Can these be quantified?
114
Imagine a conversation between a doctor and a patient. The doctor asks
questions to determine the cause of the ailment. The doctor would continue to
ask questions, till she is able to arrive at a reasonable decision. If nothing
seems plausible, she might recommend some tests to generate more data and
options.
This is how experts in any field solve problems. They use decision trees or
decision rules. For every question they ask, the potential answers create
separate branches for further questioning. For each branch, the expert would
know how to proceed ahead. The process continues until the end of the tree is
reached, which means a leaf node is reached.
Human experts learn from past experiences or data points. Similarly, a

machine can be trained to learn from the past data points and extract some
knowledge or rules from it. Decision trees use machine learning algorithms to
abstract knowledge from data. A decision tree would have a predictive
accuracy based on how often it makes correct decisions.

1. The more training data is provided, the more accurate its knowledge
extraction will be, and thus, it will make more accurate decisions.
2. The more variables the tree can choose from, the greater is the likely of
the accuracy of the decision tree.
3. In addition, a good decision tree should also be frugal so that it takes the
least number of questions, and thus, the least amount of effort, to get to
the right decision.
Here is an exercise to create a decision tree that helps make decisions about
approving the play of an outdoor game. The objective is to predict the play
decision given the atmospheric conditions out there. The decision is: Should
the game be allowed or not? Here is the decision problem.

Outlook Temp Humidity Windy Play

Sunny Hot Normal True ??
To answer that question, one should look at past experience, and see what
decision was made in a similar instance, if such an instance exists. One could
115
look up the database of past decisions to find the answer and try to come to an
answer. Here is a list of the decisions taken in 14 instances of past soccer
game situations. (Dataset courtesy: Witten, Frank, and Hall, 2010).


Sunny Hot High False No

Sunny Hot High True No

Overcast Hot High False Yes

Rainy Mild High False Yes

Rainy Cool Normal False Yes

Rainy Cool Normal True No

Overcast Cool Normal True Yes

Sunny Mild High False No

Sunny Cool Normal False Yes

Rainy Mild Normal False Yes

Sunny Mild Normal True Yes

Overcast Mild High True Yes

Overcast Hot Normal False Yes

Rainy Mild High True No
If there were a row for Sunny/Hot/Normal/Windy condition in the data table, it

would match the current problem; and the decision from that row could be
116
used to answer the current problem. However, there is no such past instance
in this case. There are three disadvantages of looking up the data table:

1. As mentioned earlier, how to decide if there isn’t a row that corresponds

to the exact situation today? If there is no exact matching instance
available in the database, the past experience cannot guide the decision.
2. Searching through the entire past database may be time consuming,
depending on the number of variables and the organization of the
database.
3. What if the data values are not available for all the variables? In this
instance, if the data for humidity variable was not available, looking up
the past data would not help.
A better way of solving the problem may be to abstract the knowledge from
the past data into decision tree or rules. These rules can be represented in a
decision tree, and then that tree can be used make the decisions. The decision
tree may not need values for all the variables.
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A decision tree is a hierarchically branched structure. What should be the first
question asked in creating the tree? One should ask the more important
question first, and the less important questions later. What is the most
important question that should be asked to solve the problem? How is the
importance of the questions determined? Thus, how should the root node of
the tree be determined?
Determining root node of the tree: In this example, there are four choices
based on the four variables. One could begin by asking one of the following
questions: what is the outlook, what is the temperature, what is the humidity,
and what is the wind speed? A criterion should be used to evaluate these
choices. The key criterion would be that: which one of these questions gives
the most insight about the situation? Another way to look at it would be the
criterion of frugality. That is, which question will provide us the shortest
ultimate decision tree? Another way to look at this is that if one is allowed to
ask one and only one question, which one would one ask? In this case, the
most important question should be the one that, by itself, helps make the most
correct decisions with the fewest errors. The four questions can now be
systematically compared, to see which variable by itself will help make the
most correct decisions. One should systematically calculate the correctness of
decisions based on each question. Then one can select the question with the
most correct predictions, or the fewest errors.
Start with the first variable, in this case outlook. It can take three values,
sunny, overcast, and rainy.
Start with the sunny value of outlook. There are five instances where the
outlook is sunny. In 2 of the 5 instances the play decision was yes, and in the
other three, the decision was No. Thus, if the decision rule was that
Outlook:sunny → No, then 3 out of 5 decisions would be correct, while 2 out
of 5 such decisions would be incorrect. There are 2 errors out of 5. This can
be recorded in Row 1.

Attribute Rules Error Total Error

Outlook Sunny→No 2/5

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Similar analysis would be done for other values of the outlook variable. There
are four instances where the outlook is overcast. In all 4 out 4 instances the
Play decision was yes. Thus, if the decision rule was that Outlook:overcast →
Yes, then 4 out of 4 decisions would be correct, while none of decisions
would be incorrect. There are 0 errors out of 4. This can be recorded in the
next row.



Overcast →yes 0/4

There are five instances where the outlook is rainy. In 3 of the 5 instances the
play decision was yes, and in the other three, the decision was no. Thus, if the
decision rule was that Outlook:rainy→ Yes, then 3 out of 5 decisions would
be correct, while 2 out of 5 decisions would be incorrect. There will be 2/5
errors. This can be recorded in next row.



Overcast →yes 0/4 4/14

Rainy →yes 2/5
Adding up errors for all values of outlook, there are 4 errors out of 14. In
other words, Outlook gives 10 correct decisions out of 14, and 4 incorrect
ones.
A similar analysis can be done for the other three variables. At the end of that
analytical exercise, the following Error table will be constructed.
119



Overcast →yes 0/4 4/14

Rainy →yes 2/5

Temp Hot →No 2/4

Mild →Yes 2/6 5/14

Cool → Yes 1/4

Humidity High → No 3/7
4/14
Normal →Yes 1/7

Windy False →Yes 2/8
5/14
True →No 3/6
The variable that leads to the least number of errors (and thus the most
number of correct decisions) should be chosen as the first node. In this case,
two variables have the least number of errors. There is a tie between outlook
and humidity, as both have 4 errors out of 14 instances. The tie can be broken
using another criterion, the purity of resulting sub-trees.
If all the errors were concentrated in a few of the subtrees, and some of the
branches were completely free of error, that is preferred from a usability
perspective. Outlook has one error-free branch, for the overcast value, while
there is no such pure sub-class for humidity variable. Thus the tie is broken in
favor of outlook. The decision tree will use outlook as the first node, or the
first splitting variable. The first question that should be asked to solve the
Play problem, is ‘What is the value of outlook’?
Splitting the Tree: From the root node, the decision tree will be split into three
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branches or sub-trees, one for each of the three values of outlook. Data for the
root node (the entire data) will be divided into the three segments, one for
each of the value of outlook. The sunny branch will inherit the data for the
instances that had sunny as the value of outlook. These will be used for
further building of that sub-tree. Similarly, the rainy branch will inherit data
for the instances that had rainy as the value of outlook. These will be used for
further building of that sub-tree. The overcast branch will inherit the data for
the instances that had overcast as the outlook. However, there will be no need
to build further on that branch. There is a clear decision, yes, for all instances
when outlook value is overcast.
The decision tree will look like this after the first level of splitting.
Determining the next nodes of the tree: A similar recursive logic of tree
building should be applied to each branch. For the sunny branch on the left,
error values will be calculated for the three other variables – temp, humidity
and windy. Final comparison looks like this:


Temp Hot->No 0/2

Mild ->No 1/2 1/5

Cool -> yes 0/1

Humidity High->No 0/3
0/5
Normal->Yes 0/2
121

Windy False->No 1/3
2/5
True->Yes 1/2
The variable of humidity shows the least amount of error, i.e. zero error. The
other two variables have non-zero errors. Thus the Outlook:sunny branch on
the left will use humidity as the next splitting variable.
Similar analysis should be done for the ‘rainy’ value of the tree. The analysis
would look like this.


Temp Mild->Yes 1/3
2/5
Cool->yes 1/2

Humidity High->No 1/2
2/5
Normal->Yes 1/3

Windy False->Yes 0/3
0/5
True-No 0/2
For the Rainy branch, it can similarly be seen that the variable Windy gives
all the correct answers, while none of the other two variables makes all the
correct decisions.
This is how the final decision tree looks like. Here it is produced using Weka
open-source data mining platform (Figure 6.1). This is the model that
abstracts the knowledge of the past data of decision.
122
Figure 6.1: Decision Tree for the weather problem
This decision tree can be used to solve the current problem. Here is the
problem again.


Sunny Hot Normal True ??
According to the tree, the first question to ask is about outlook. In this
problem the outlook is sunny. So, the decision problem moves to the Sunny
branch of the tree. The node in that sub-tree is humidity. In the problem,
Humidity is Normal. That branch leads to an answer Yes. Thus, the answer to
the play problem is Yes.


Sunny Hot Normal True Yes
123
Here are some benefits of using this decision tree compared with looking up
the answers from the data table (Figure 6.1)

Decision Tree Table Lookup

Varied level of
Accuracy 100% accurate
accuracy

General. Applies to all Applies only when a similar case had
Generality
situations occurred earlier

Only three variables
Frugality All four variables are needed
needed

Only one, or max two
Simple variable values are All four variable values are needed
needed

Can be cumbersome to look up; no
Logical, and easy to
Easy understanding of the logic behind the
understand
decision
Figure 6.1: Comparing Decision Tree with Table Look-up
Here are a few observations about how the tree was constructed:

1. The final decision tree has zero errors in mapping to the prior data. In
other words, the tree has a predictive accuracy of 100%. The tree
completely fits the data. In real life situations, such perfect predictive
accuracy is not possible when making decision trees. When there are
larger, complicated data sets, with many more variables, a perfect fit is
unachievable. This is especially true in business and social contexts,
where things are not always fully clear and consistent.
2. The decision tree algorithm selected the minimum number of variables
that are needed to solve the problem. Thus, one can start with all
available data variables, and let the decision-tree algorithm select the
ones that are useful, and discard the rest.
124
3. This tree is almost symmetric with all branches being of almost similar
lengths. However, in real life situations, some of the branches may be
much longer than the others, and the tree may need to be pruned to make
it more balanced and usable.
4. It may be possible to increase predictive accuracy by making more sub-
trees and making the tree longer. However, the marginal accuracy gained
from each subsequent level in the tree will be less, and may not be worth
the loss in ease and interpretability of the tree. If the branches are long
and complicated, it will be difficult to understand and use. The longer
branches may need to be trimmed to keep the tree easy to use.
5. A perfectly fitting tree has the danger of over-fitting the data, thus
capturing all the random variations in the data. It may fit the training
data well, but may not do well in predicting the future real instances.
6. There was a single best tree for this data. There could however be two or
more equally efficient decision trees of similar length with similar
predictive accuracy for the same data set. Decision trees are based
strictly on patterns within the data, and do not rely on any underlying
theory of the problem domain. When multiple candidate trees are
available, one could choose whichever is easier to understand,
communicate or implement.
125
As we saw, decision trees employ the divide and conquer method. The data is
branched at each node according to certain criteria until all the data is
assigned to leaf nodes. It recursively divides a training set until each division
consists of examples from one class.
The following is a pseudo code for making decision trees:

1. Create a root node and assign all of the training data to it.
2. Select the best splitting attribute according to certain criteria.
3. Add a branch to the root node for each value of the split.
4. Split the data into mutually exclusive subsets along the lines of the
specific split.
5. Repeat steps 2 and 3 for each and every leaf node until a stopping
criteria is reached.
There are many algorithms for making decision trees. Decision tree
algorithms differ on three key elements:

1. Splitting criteria
1. Which variable to use for the first split? How should one determine
the most important variable for the first branch, and subsequently,
for each sub-tree? There are many measures like least errors,
information gain, gini’s coefficient, etc.
2. What values to use for the split? If the variables have continuous
values such as for age or blood pressure, what value-ranges should
be used to make bins?
3. How many branches should be allowed for each node? There could
be binary trees, with just two branches at each node. Or there could
be more branches allowed.
2. Stopping criteria: When to stop building the tree? There are two major
ways to make that determination. The tree building could be stopped
when a certain depth of the branches has been reached and the tree
becomes unreadable after that. The tree could also be stopped when the
error level at any node is within predefined tolerable levels.
3. Pruning : The tree could be trimmed to make it more balanced and more
easily usable. The pruning is often done after the tree is constructed, to
balance out the tree and improve usability. The symptoms of an over-
fitted tree are a tree too deep, with too many branches, some of which
may reflect anomalies due to noise or outliers. Thus, the tree should be
126
pruned. There are two approaches to avoid over-fitting.
- Pre-pruning means

to halt the tree

construction early,
when certain criteria
are met. The downside
is that it is difficult to
decide what criteria to
use for halting the
construction, because
we do not know what
may happen
subsequently, if we
keep growing the tree.
- Post-pruning:

Remove branches or
sub-trees from a “fully
grown” tree. This
method is commonly
used. C4.5 algorithm
uses a statistical
method to estimate the
errors at each node for
pruning. A validation
set may be used for
pruning as well.
The most popular decision tree algorithms are C5, CART and CHAID (Table
6.2)
Figure 6.2: Comparing popular Decision Tree algorithms

Decision-Tree C4.5 CART CHAID

Chi-square
Iterative
Classification and Automatic
Full Name Dichotomiser
Regression Trees Interaction
(ID3)
Detector

127
Basic Hunt’s adjusted
algorithm algorithm Hunt’s algorithm significance
testing

Developer Ross Quinlan Bremman Gordon Kass

When
1986 1984 1980
developed

Classification & Classification &
Types of trees Classification
Regression trees regression

Serial Tree-growth & Tree-growth & Tree- Tree-growth &
implementation Tree-pruning pruning Tree-pruning

Discrete & Non-normal
Discrete and
Type of data Continuous; data also
Continuous
Incomplete data accepted

Binary splits only;
Multi-way splits
Types of splits Multi-way splits Clever surrogate splits
as default
to reduce tree depth

Splitting Gini’s coefficient, and
Information gain Chi-square test
criteria others

Clever bottom-
Trees can
Pruning up technique Remove weakest links
become very
Criteria avoids first
large
overfitting

Popular in
Publicly Publicly available in
Implementation market research,
available most packages
for segmentation

128
Conclusion
Decision trees are the most popular, versatile, and easy to use data mining
technique with high predictive accuracy. They are also very useful as
communication tools with executives. There are many successful decision
tree algorithms. All publicly available data mining software platforms offer
multiple decision tree implementations.
129
Review Questions
1: What is a decision tree? Why are decision trees the most popular
classification technique?
2: What is a splitting variable? Describe three criteria for choosing splitting

variable.
3: What is pruning? What are pre-pruning and post-pruning? Why choose one
over the other?
4: What are gini’s coefficient, and information gain? (Hint: google it).
Hands-on Exercise: Create a decision tree for the following data set. The
objective is to predict the class category. (loan approved or not).

Age Job House Credit LoanApproved

Young False No Fair No

Young False No Good No

Young True No Good Yes

Young True Yes Fair Yes

Young False No Fair No

Middle False No Fair No

Middle False No Good No

Middle True Yes Good Yes

Middle False Yes Excellent Yes

Middle False Yes Excellent Yes

130
Old False Yes Excellent Yes

Old False Yes Good Yes

Old True No Good Yes

Old True No Excellent Yes

Old False No Fair No
Then solve the following problem using the model.

Age Job House Credit LoanApproved

Young False False Good ??

131
Liberty is constantly evaluating requests for opening new stores. They would
like to formalize the process for handling many requests, so that the best
candidates are selected for detailed evaluation.
Develop a decision tree for evaluating new stores options. Here is the
training data:

City-size Avg Income Local investors LOHAS awareness Decision

Big High yes High yes

Med Med no Med no

Small Low yes Low no

Big High no High Yes

Small med yes High No

Med high yes med Yes

Med med yes med No

Big med no med No

Med high yes low No

Small High no High Yes

Small med no High No

Med high no med No

Use the decision tree to answer the following question?
132

City-size Avg Income Local investors LOHAS awareness Decision

Med med no med ??

133

Regression is a well-known statistical technique to model the predictive

relationship between several independent variables (DVs) and one dependent
variable. The objective is to find the best-fitting curve for a dependent
variable in a multidimensional space, with each independent variable being a
dimension. The curve could be a straight line, or it could be a nonlinear curve.
The quality of fit of the curve to the data can be measured by a coefficient of
correlation (r), which is the square root of the amount of variance explained
by the curve.
The key steps for regression are simple:

1. List all the variables available for making the model.

2. Establish a Dependent Variable (DV) of interest.
3. Examine visual (if possible) relationships between variables of interest.
4. Find a way to predict DV using the other variables.
134
Traditional pollsters still seem to be using methodologies
that worked well a decade or two ago. Nate Silver is a
new breed of data-based political forecasters who are
seeped in big data and advanced analytics. In the 2012
elections, he predicted that Obama would win the election
with 291 electoral votes, compared to 247 for Mitt
Romney, giving the President a 62% lead and re-election.
He stunned the political forecasting world by correctly
predicting the Presidential winner in all 50 states,
including all nine swing states. He also, correctly
predicted the winner in 31 of the 33 US Senate races.

Nate Silver brings a different view to the world of
forecasting political elections, viewing it as a scientific
discipline. State the hypothesis scientifically, gather all
available information, analyze the data and extract
insights using sophisticated models and algorithms and
finally, apply human judgment to interpret those insights.
The results are likely to be much more grounded and
successful. (Source: The Signal and the Noise: Why Most
Predictions Fail but Some Don’t, by Nate Silver, 2012)

Q1: What is the impact of this story on traditional
pollsters & commentators?
135
Statistical relationships are about which elements of data hang together, and
which ones hang separately. It is about categorizing variables that have a
relationship with one another, and categorizing variables that are distinct and
unrelated to other variables. It is about describing significant positive
relationships and significant negative differences.
The first and foremost measure of the strength of a relationship is co-relation

(or correlation). The strength of a correlation is a quantitative measure that is
measured in a normalized range between 0 (zero) and 1. A correlation of 1
indicates a perfect relationship, where the two variables are in perfect sync. A
correlation of 0 indicates that there is no relationship between the variables.
The relationship can be positive, or it can be an inverse relationship, that is,

the variables may move together in the same direction or in the opposite
direction. Therefore, a good measure of correlation is the correlation
coefficient, which is the square root of correlation. This coefficient, called r,
can thus range from −1 to +1. An r value of 0 signifies no relationship. An r
value of 1 shows perfect relationship in the same direction, and an r value of
−1 shows a perfect relationship but moving in opposite directions.
Given two numeric variables x and y, the coefficient of correlation r is

mathematically computed by the following equation. ̄ x (called x-bar) is the
mean of x, and ȳ (y-bar) is the mean of y.
136
A scatter plot (or scatter diagram) is a simple exercise for plotting all data
points between two variables on a two-dimensional graph. It provides a visual
layout of where all the data points are placed in that two-dimensional space.
The scatter plot can be useful for graphically intuiting the relationship
between two variables.
Here is a picture (Figure 7.1) that shows many possible patterns in scatter
diagrams.
Figure 7.1: Scatter plots showing types of relationships among two variables
(Source: Groebner et al. 2013)
Chart (a) shows a very strong linear relationship between the variables x and
y. That means the value of y increases proportionally with x. Chart (b) also
shows a strong linear relationship between the variables x and y. Here it is an
inverse relationship. That means the value of y decreases proportionally with
x.
Chart (c) shows a curvilinear relationship. It is an inverse relationship, which

means that the value of y decreases proportionally with x. However, it seems a
relatively well-defined relationship, like an arc of a circle, which can be
represented by a simple quadratic equation (quadratic means the power of
two, that is, using terms like x and y ). Chart (d) shows a positive curvilinear
2 2
relationship. However, it does not seem to resemble a regular shape, and thus
would not be a strong relationship. Charts (e) and (f) show no relationship.
That means variables x and y are independent of each other.
Charts (a) and (b) are good candidates that model a simple linear regression
model (the terms regression model and regression equation can be used
137
interchangeably). Chart (c) too could be modeled with a little more complex,
quadratic regression equation. Chart (d) might require an even higher order
polynomial regression equation to represent the data. Charts (e) and (f) have
no relationship, thus, they cannot be modeled together, by regression or using
any other modeling tool.
138
Regression Exercise
The regression model is described as a linear equation that follows. y is the
dependent variable, that is, the variable being predicted. x is the independent
variable, or the predictor variable. There could be many predictor variables
(such as x , x , . . .) in a regression equation. However, there can be only one
1 2
dependent variable (y) in the regression equation.
y = β + β x + ε
0 1
A simple example of a regression equation would be to predict a house price

from the size of the house. Here is a sample house prices data:

House Price Size (sqft)

$229,500 1850

$273,300 2190

$247,000 2100

$195,100 1930

$261,000 2300

$179,700 1710

$168,500 1550

$234,400 1920

$168,800 1840

$180,400 1720

$156,200 1660

$288,350 2405
139

$186,750 1525

$202,100 2030

$256,800 2240

The two dimensions of (one predictor, one outcome variable) data can be
plotted on a scatter diagram. A scatter plot with a best-fitting line looks like
the graph that follows (Figure 7.2).
Figure 7.2: Scatter plot and regression equation between House price and
house size.
Visually, one can see a positive correlation between House Price and Size
(sqft). However, the relationship is not perfect. Running a regression model
between the two variables produces the following output (truncated).

Regression Statistics

r 0.891

r 2
0.794

Coefficients
140

Intercept -54191

Size (sqft) 139.48
It shows the coefficient of correlation is 0.891. r , the measure of total

2
variance explained by the equation, is 0.794, or 79%. That means the two
variables are moderately and positively correlated. Regression coefficients
help create the following equation for predicting house prices.
House Price ($) = 139.48 * Size(sqft) – 54191
This equation explains only 79% of the variance in house prices. Suppose
other predictor variables are made available, such as the number of rooms in
the house. It might help improve the regression model.
141
The house data now looks like this:

House Price Size (sqft) #Rooms

$229,500 1850 4

$273,300 2190 5

$247,000 2100 4

$195,100 1930 3

$261,000 2300 4

$179,700 1710 2

$168,500 1550 2

$234,400 1920 4

$168,800 1840 2

$180,400 1720 2

$156,200 1660 2

$288,350 2405 5

$186,750 1525 3

$202,100 2030 2

$256,800 2240 4

142
While it is possible to make a 3-dimensional scatter plot, one can alternatively
examine the correlation matrix among the variables.


House Price 1

Size (sqft) 0.891 1

Rooms 0.944 0.748 1
It shows that the House price has a strong correlation with number of rooms
(0.944) as well. Thus, it is likely that adding this variable to the regression
model will add to the strength of the model.
Running a regression model between these three variables produces the

following output (truncated).


r 0.984

r 2
0.968

Coefficients

Intercept 12923

Size(sqft) 65.60

Rooms 23613
It shows the co-efficient of correlation of this regression model is 0.984. R , 2
the total variance explained by the equation, is 0.968 or 97%. That means the
variables are positively and very strongly correlated. Adding a new relevant
variable has helped improve the strength of the regression model.
143
Using the regression coefficients helps create the following equation for
predicting house prices.
House Price ($) = 65.6 * Size (sqft) + 23613 * Rooms + 12924
This equation shows a 97% goodness of fit with the data, which is very good
for business and economic data. There is always some random variation in
naturally occurring business data, and it is not desirable to overfit the model
to the data.
This predictive equation should be used for future transactions. Given a

situation as below, it will be possible to predict the price of the house with
2000 sq ft and 3 rooms.


?? 2000 3

House Price ($) = 65.6 * 2000 (sqft) + 23613 * 3 + 12924 = $214,963
The predicted values should be compared with the actual values to see how
close the model is able to predict the actual value. As new data points become
available, there are opportunities to fine-tune and improve the model.
144
The relationship between the variables may also be curvilinear. For example,
given past data from electricity consumption (KwH) and temperature (temp),
the objective is to predict the electrical consumption from the temperature
value. Here are a dozen past observations.

KWatts Temp (F)

12530 46.8

10800 52.1

10180 55.1

9730 59.2

9750 61.9

10230 66.2

11160 69.9

13910 76.8

15690 79.3

15110 79.7

17020 80.2

17880 83.3
In two dimensions (one predictor, one outcome variable) data can be plotted
on a scatter diagram. A scatter plot with a best-fitting line looks like the graph
below (Figure 7.3).
145
Figure 6.2: Scatter plots showing regression between (a) kwatts and temp, and
(b) kwatts and temp square
It is visually clear that the first line does not fit the data well. The relationship
between temperature and Kwatts follows a curvilinear model, where it hits
bottom at a certain value of temperature. The regression model confirms the
relationship since R is only 0.77 and R-square is also only 60%. Thus, only
60% of the variance is explained.
The regression model can then be enhanced using a Temp variable in the
2
equation. The second line is the relationship between KWH and Temp . The 2
scatter plot shows that the Energy consumption shows a strong linear
relationship with the quadratic Temp variable. Running the regression model
2
after adding the quadratic variable, leads to the following results:


r 0.992

r 2
0.984

Coefficients

Intercept 67245

146
Temp (F) -1911

Temp-sq 15.87
It shows that the co-efficient of correlation of the regression model is now
0.99. R , the total variance explained by the equation is 0.985, or 98.5%. That
2
means the variables are very strongly and positively correlated. The
regression coefficients help create the following equation for
Energy Consumption (Kwatts) = 15.87 * Temp -1911 * Temp + 67245

2
This equation shows a 98.5% fit which is very good for business and
economic contexts. Now one can predict the Kwatts value for when the
temperature is 72-degrees.
Energy consumption = (15.87 * 72*72) - (1911 * 72) + 67245 = 11923

Kwatts
147
Logistic Regression
Regression models traditionally work with continuous numeric value data for
dependent and independent variables. Logistic regression models can,
however, work with dependent variables with binary values, such as whether
a loan is approved (yes or no). Logistic regression measures the relationship
between a categorical dependent variable and one or more independent
variables. For example, Logistic regression might be used to predict whether a
patient has a given disease (e.g. diabetes), based on observed characteristics
of the patient (age, gender, body mass index, results of blood tests, etc.).
Logistical regression models use probability scores as the predicted values of

the dependent variable. Logistic regression takes the natural logarithm of the
odds of the dependent variable being a case (referred to as the logit) to create
a continuous criterion as a transformed version of the dependent variable.
Thus the logit transformation is used in logistic regression as the dependent
variable. The net effect is that although the dependent variable in logistic
regression is binomial (or categorical, i.e. has only two possible values), the
logit is the continuous function upon which linear regression is conducted.
Here is the general logistic function, with independent variable on the
horizontal axis and the logit dependent variable on the vertical axis (Figure
7.3).
Figure 7.3: General Logit function
All popular data mining platforms provide support for regular multiple
regression models, as well as options for Logistic Regression.
148
Regression Models are very popular because they offer many advantages.

1. Regression models are easy to understand as they are built upon basic
statistical principles such as correlation and least square error.
2. Regression models provide simple algebraic equations that are easy to
understand and use.
3. The strength (or the goodness of fit) of the regression model is measured
in terms of the correlation coefficients, and other related statistical
parameters that are well understood.
4. Regression models can match and beat the predictive power of other
modeling techniques.
5. Regression models can include all the variables that one wants to include
in the model.
6. Regression modeling tools are pervasive. They are found in statistical
packages as well as data mining packages. MS Excel spreadsheets can
also provide simple regression modeling capabilities.
Regression models can however prove inadequate under many circumstances.

1. Regression models can not cover for poor data quality issues. If the data
is not prepared well to remove missing values, or is not well-behaved in
terms of a normal distribution, the validity of the model suffers.
2. Regression models suffer from collinearity problems (meaning strong
linear correlations among some independent variables). If the
independent variables have strong correlations among themselves, then
they will eat into each other’s predictive power and the regression
coefficients will lose their ruggedness. Regression models will not
automatically choose between highly collinear variables, although some
packages attempt to do that.
3. Regression models can be unwieldy and unreliable if a large number of
variables are included in the model. All variables entered into the model
will be reflected in the regression equation, irrespective of their
contribution to the predictive power of the model. There is no concept of
automatic pruning of the regression model.
4. Regression models do not automatically take care of non-linearity. The
user needs to imagine the kind of additional terms that might be needed
to be added to the regression model to improve its fit.
5. Regression models work only with numeric data and not with categorical
variables. There are ways to deal with categorical variables though by
149
creating multiple new variables with a yes/no value.
150
Conclusion
Regression models are simple, versatile, visual/graphical tools with high
predictive ability. They include non-linear as well as binary predictions.
Regression models should be used in conjunction with other data mining
techniques to confirm the findings.
***
151
Review Exercises:
Q1: What is a regression model?
Q2: What is a scatter plot? How does it help?
Q3: Compare and contrast decision trees with regression models?
Q4: Using the data below, create a regression model to predict the Test2 from
the Test1 score. Then predict the score for one who got a 46 in Test1.

Test1 Test2

59 56

52 63

44 55

51 50

42 66

42 48

41 58

45 36

27 13

63 50

54 81

44 56

50 64
152

47 50

153
Liberty wants to forecast its sales for next year, for financial budgeting.

# Revenue
Year Global GDP # cust serv # Items
index per capita calls(‘000s)
employees
(‘000) ($M)
(‘000)

1 100 25 45 11 2000

2 112 27 53 11 2400

3 115 22 54 12 2700

4 123 27 58 14 2900

5 122 32 60 14 3200

6 132 33 65 15 3500

7 143 40 72 16 4000

8 126 30 65 16 4200

9 166 34 85 17 4500

10 157 47 97 18 4700

11 176 33 98 18 4900

12 180 45 100 20 5000
Check the correlations. Which variables are strongly correlated?
Create a regression model that best predicts the revenue.
154
155

Artificial Neural Networks (ANN) are inspired by the information processing

model of the mind/brain. The human brain consists of billions of neurons that
link with one another in an intricate pattern. Every neuron receives
information from many other neurons, processes it, gets excited or not, and
passes its state information to other neurons.
Just like the brain is a multipurpose system, so also the ANNs are very
versatile systems. They can be used for many kinds of pattern recognition and
prediction. They are also used for classification, regression, clustering,
association, and optimization activities. They are used in finance, marketing,
manufacturing, operations, information systems applications, and so on.
ANNs are composed of a large number of highly interconnected processing

elements (neurons) working in a multi-layered structures that receive inputs,
process the inputs, and produce an output. An ANN is designed for a specific
application, such as pattern recognition or data classification, and trained
through a learning process. Just like in biological systems, ANNs make
adjustments to the synaptic connections with each learning instance.
ANNs are like a black box trained into solving a particular type of problem,
and they can develop high predictive powers. Their intermediate synaptic
parameter values evolve as the system obtains feedback on its predictions,
and thus an ANN learns from more training data (Figure 8.1).
Figure 8.1: General ANN model

156
The amount of medical
information available is
doubling every five years and
much of this data is
unstructured. Physicians simply
don't have time to read every
journal that can help them keep
up to date with the latest
advances. Mistakes in diagnosis
are likely to happen and clients
have become more aware of the
evidence. Analytics will
transform the field of medicine
into Evidence-based medicine.
How can healthcare providers
address these problems?
IBM’s Watson cognitive
computing system can analyze
large amounts of unstructured
text and develop hypotheses
based on that analysis.
Physicians can use Watson to
assist in diagnosing and treating
patients. First, the physician
might describe symptoms and
other related factors to the
system. Watson can then identify
the key pieces of information and
mine the patient’s data to find
relevant facts about family
history, current medications and
other existing conditions. It
combines this information with
current findings from tests, and
then forms and tests a
hypotheses by examining a
variety of data sources—
treatment guidelines, electronic
medical record data and doctors’
and nurses’ notes, as well as
157
peer-reviewed research and
clinical studies. From here,
Watson can provide potential
treatment options and its
confidence rating for each
suggestion.
Watson has been deployed at
many leading healthcare
institutions to improve the
quality and efficiency of
healthcare decisions; to help
clinicians uncover insights from
its patient information in
electronic medical records
(EMR); among other benefits.
Q1: How would IBM Watson
change medical practices in the
future?
Q2: In what other industries &
functions could this technology
be applied?
158
Neural networks are used most often when the objective function is complex,
and where there exists plenty of data, and the model is expected to improve
over a period of time. A few sample applications:

1. They are used in stock price prediction where the rules of the game are
extremely complicated, and a lot of data needs to be processed very
quickly.
2. They are used for character recognition, as in recognizing hand-written
text, or damaged or mangled text. They are used in recognizing finger
prints. These are complicated patterns and are unique for each person.
Layers of neurons can progressively clarify the pattern leading to a
remarkably accurate result.
3. They are also used in traditional classification problems, like approving a
financial loan application.
159
1. A neuron is the basic processing unit of the network. The neuron (or
processing element) receives inputs from its preceding neurons (or PEs),
does some nonlinear weighted computation on the basis of those inputs,
transforms the result into its output value, and then passes on the output
to the next neuron in the network (Figure 8.2). X’s are the inputs, w’s are
the weights for each input, and y is the output.
Figure 8.2: Model for a single artificial neuron

2. A Neural network is a multi-layered model. There is at least one input

neuron, one output neuron, and at least one processing neuron. An ANN
with just this basic structure would be a simple, single-stage
computational unit. A simple task may be processed by just that one
neuron and the result may be communicated soon. ANNs however, may
have multiple layers of processing elements in sequence. There could be
many neurons involved in a sequence depending upon the complexity of
the predictive action. The layers of PEs could work in sequence, or they
could work in parallel (Figure 8.3).
160
Figure 8.3: Model for a multi-layer ANN
3. The processing logic of each neuron may assign different weights to the
various incoming input streams. The processing logic may also use non-
linear transformation, such as a sigmoid function, from the processed
values to the output value. This processing logic and the intermediate
weight and processing functions are just what works for the system as a
whole, in its objective of solving a problem collectively. Thus, neural
networks are considered to be an opaque and a black-box system.
4. The neural network can be trained by making similar decisions over and
over again with many training cases. It will continue to learn by
adjusting its internal computation and communication based on feedback
about its previous decisions. Thus, the neural networks become better at
making a decision as they handle more and more decisions.
Depending upon the nature of the problem and the availability of good
training data, at some point the neural network will learn enough and begin to
match the predictive accuracy of a human expert. In many practical situations,
the predictions of ANN, trained over a long period of time with a large
number of training data, have begun to decisively become more accurate than
human experts. At that point ANN can begin to be seriously considered for
deployment in real situations in real time.
161
A neural network is a series of neurons that receive inputs from other neurons.
They do a weighted summation function of all the inputs, using different
weights (or importance) for each input. The weighted sum is then transformed
into an output value using a transfer function.
Learning in ANN occurs when the various processing elements in the neural
network adjust the underlying relationship (weights, transfer function, etc)
between input and outputs, in response to the feedback on their predictions. If
the prediction made was correct, then the weights would remain the same, but
if the prediction was incorrect, then the parameter values would change.
The Transformation (Transfer) Function is any function suitable for the task at
hand. The transfer function for ANNs is usually a non-linear sigmoid
function. Thus, if the normalized computed value is less than some value (say
0.5) then the output value will be zero. If the computed value is at the cut-off
threshold, then the output value will be a 1. It could be a nonlinear hyperbolic
function in which the output is either a -1 or a 1. Many other functions could
be designed for any or all of the processing elements.
Thus, in a neural network, every processing element can potentially have a

different number of input values, a different set of weights for those inputs,
and a different transformation function. Those values support and compensate
for one another until the neural network as a whole learns to provide the
correct output, as desired by the user.
162
There are many ways to architect the functioning of an ANN using fairly
simple and open rules with a tremendous amount of flexibility at each stage.
The most popular architecture is a Feed-forward, multi-layered perceptron
with back-propagation learning algorithm. That means there are multiple
layers of PEs in the system and the output of neurons are fed forward to the
PEs in the next layers; and the feedback on the prediction is fed back into the
neural network for learning to occur. This is essentially what was described in
the earlier paragraphs. ANN architectures for different applications are
shown in Table 8.1.

Feedforward networks (MLP), radial basis
Classification
function, and probabilistic

Feedforward networks (MLP), radial basis
Regression
function

Adaptive resonance theory (ART), Self-
Clustering
organizing maps (SOMs)

Association
Hopfield networks
Rule Mining
Table 8.1: ANN architectures for different applications
163
Developing an ANN
It takes resources, training data, skill and time to develop
a neural network. Most data mining platforms offer at
least the Multi-Layer-Perceptron (MLP) algorithm to
implement a neural network. Other neural network
architectures include Probabilistic networks and Self-
organizing feature maps.
The steps required to build an ANN are as follows:

1. Gather data. Divide into training data and test data. The training data
needs to be further divided into training data and validation data.
2. Select the network architecture, such as Feedforward network.
3. Select the algorithm, such as Multi-layer Perception.
4. Set network parameters.
5. Train the ANN with training data.
6. Validate the model with validation data.
7. Freeze the weights and other parameters.
8. Test the trained network with test data.
9. Deploy the ANN when it achieves good predictive accuracy.
Training an ANN requires that the training data be split

into three parts (Table 8.2):

Training This data set is used to adjust the weights on the
set neural network (∼ 60%).

Validation This data set is used to minimize overfitting and
set verifying accuracy (∼ 20%).

This data set is used only for testing the final solution
Testing
in order to confirm the actual predictive power of the
set
network (∼ 20%).

This approach means that the data is divided into k

equal pieces, and the learning process is repeated k-
k-fold
times with each pieces becoming the training set. This
cross-
process leads to less bias and more accuracy, but is
validation
164
more time consuming.
Table 8.2: ANN Training datasets
165
There are many benefits of using ANN.

1. ANNs impose very little restrictions on their use. ANN can deal with
(identify/model) highly nonlinear relationships on their own, without
much work from the user or analyst. They help find practical data-driven
solutions where algorithmic solutions are non-existent or too
complicated.
2. There is no need to program neural networks, as they learn from
examples. They get better with use, without much programming effort.
3. They can handle a variety of problem types, including classification,
clustering, associations, etc.
4. ANN are tolerant of data quality issues and they do not restrict the data
to follow strict normality and/or independence assumptions.
5. They can handle both numerical and categorical variables.
6. ANNs can be much faster than other techniques.
7. Most importantly, they usually provide better results (prediction and/or
clustering) compared to statistical counterparts, once they have been
trained enough.
The key disadvantages arise from the fact that they are
not easy to interpret or explain or compute.

1. They are deemed to be black-box solutions, lacking explainability. Thus
they are difficult to communicate about, except through the strength of
their results.
2. Optimal design of ANN is still an art: it requires expertise and extensive
experimentation.
3. It can be difficult to handle a large number of variables (especially the
rich nominal attributes).
4. It takes large data sets to train an ANN.
166
Conclusion
Artificial neural networks are complex systems that
mirror the functioning of the human brain. They are
versatile enough to solve many data mining tasks with
high accuracy. However, they are like black boxes and
they provide little guidance on the intuitive logic behind
their predictions.
167
Review Exercises
1: What is a neural network? How does it work?
2: Compare a neural network with a decision tree.
3: What makes a neural network versatile enough for

supervised as well as non-supervised learning tasks?
4: Examine the steps in developing a neural network for

predicting stock prices. What kind of objective function
and what kind of data would be required for a good stock
price predictor system using ANN?

***
168
Cluster analysis is used for automatic identification of natural groupings of
things. It is also known as the segmentation technique. In this technique, data
instances that are similar to (or near) each other are categorized into one
cluster. Similarly, data instances that are very different (or far away) from
each other are moved into different clusters.
Clustering is an unsupervised learning technique as there is no output or

dependent variable for which a right or wrong answer can be computed. The
correct number of clusters or the definition of those clusters is not known
ahead of time. Clustering techniques can only suggest to the user how many
clusters would make sense from the characteristics of the data. The user can
specify a different, larger or smaller, number of desired clusters based on their
making business sense. The cluster analysis technique will then define many
distinct clusters from analysis of the data, with cluster definitions for each of
those clusters. However, there are good cluster definitions, depending on how
closely the cluster parameters fit the data.
169
A national insurance company distributes its personal and small commercial
insurance products through independent agents. They wanted to increase
their sales by better understanding their customers. They were interested in
increasing their market share by doing some direct marketing campaigns,
however without creating a channel conflict with the independent agents.
They were also interested in examining different customer segments based on
their needs, and the profitability of each of those segments.
They gathered attitudinal, behavioral, and demographic data using a mail

survey of 2000 U.S. households that own auto insurance. Additional geo-
demographic and credit information was added to the survey data. Cluster
analysis of the data revealed five roughly equal segments:

Non-Traditionals: interested in using the Internet and/or buying

insurance at work.
Direct Buyers: interested in buying via direct mail or telephone.
Budget Conscious: interested in minimal coverage and finding the best
deal.
Agent Loyals: expressed strong loyalty to their agents and high levels of
personal service.
Hassle-Free: similar to Agent Loyals but less interested in face-to-face
service.
(Source: greenbook.org)
Q1. Which customer segments would you choose

for direct marketing? Will these create a channel conflict?
Q2. Could this segmentation apply to other

service businesses? Which ones?
170
Cluster analysis is used in almost every field where there is a large variety of
transactions. It helps provide characterization, definition, and labels for
populations. It can help identify natural groupings of customers, products,
patients, and so on. It can also help identify outliers in a specific domain and
thus decrease the size and complexity of problems. A prominent business
application of cluster analysis is in market research. Customers are segmented
into clusters based on their characteristics—wants and needs, geography,
price sensitivity, and so on. Here are some examples of clustering:

1. Market Segmentation: Categorizing customers according to their

similarities, for instance by their common wants and needs, and
propensity to pay, can help with targeted marketing.
2. Product portfolio: People of similar sizes can be grouped together to
make small, medium and large sizes for clothing items.
3. Text Mining: Clustering can help organize a given collection of text
documents according to their content similarities into clusters of related
topics.
171
An operational definition of a cluster is that, given a representation of n
objects, find K groups based on a measure of similarity, such that objects
within the same group are alike but the objects in different groups are not
alike.
However, the notion of similarity can be interpreted in many ways. Clusters

can differ in terms of their shape, size, and density. Clusters are patterns, and
there can be many kinds of patterns. Some clusters are the traditional types,
such as data points hanging together. However, there are other clusters, such
as all points representing the circumference of a circle. There may be
concentric circles with points of different circles representing different
clusters. The presence of noise in the data makes the detection of the clusters
even more difficult.
An ideal cluster can be defined as a set of points that is compact and isolated.
In reality, a cluster is a subjective entity whose significance and interpretation
requires domain knowledge. In the sample data below (Figure 9.1), how many
clusters can one visualize?
Figure 9.1: Visual cluster example
It seems like there are two clusters of approximately equal sizes. However,
they can be seen as three clusters, depending on how we draw the dividing
lines. There is not a truly optimal way to calculate it. Heuristics are often used
to define the number of clusters.
172
The clusters can be represented by a central or modal value. A cluster can be
defined as the centroid of the collection of points belonging to it. A centroid is
a measure of central tendency. It is the point from where the sum total of
squared distance from all the points is the minimum. A real-life equivalent
would be the city center as the point that is considered the most easy to use by
all constituents of the city. Thus all cities are defined by their centers or
downtown areas.
A cluster can also be represented by the most frequently occurring value in

the cluster, i.e. the cluster can defined by its modal value. Thus, a particular
cluster representing a social point of view could be called the ‘soccer moms’,
even though not all members of that cluster need currently be a mom with
soccer-playing children.
173
Cluster analysis is a machine-learning technique. The quality of a clustering
result depends on the algorithm, the distance function, and the application.
First, consider the distance function. Most cluster analysis methods use a
distance measure to calculate the closeness between pairs of items. There are
two major measures of distances: Euclidian distance (“as the crow flies” or
straight line) is the most intuitive measure. The other popular measure is the
Manhattan (rectilinear) distance, where one can go only in orthogonal
directions. The Euclidian distance is the hypotenuse of a right triangle, while
the Manhattan distance is the sum of the two legs of the right triangle.
In either case, the key objective of the clustering algorithm is the same:
- Inter-clusters distanceÞ

maximized; and
- Intra-clusters distanceÞ

minimized
There are many algorithms to produce clusters. There are top-down,

hierarchical methods that start with creating a given number of best-fitting
clusters. There are also bottom-up methods that begin with identifying
naturally occurring clusters.
The most popular clustering algorithm is the K-means algorithm. It is a top-

down, statistical technique, based on the method of minimizing the least
squared distance from the center points of the clusters. Other techniques, such
as neural networks, are also used for clustering. Comparing cluster algorithms
is a difficult task as there is no single right number of clusters. However, the
speed of the algorithm and its versatility in terms of different dataset are
important criteria.
Here is the generic pseudocode for clustering

1. Pick an arbitrary number of groups/segments to be created

2. Start with some initial randomly-chosen center values for groups
3. Classify instances to closest groups
4. Compute new values for the group centers
5. Repeat step 3 & 4 till groups converge
174
6. If clusters are not satisfactory, go to step 1 and pick a different number
of groups/segments
The clustering exercise can be continued with a different number of clusters

and different location of those points. Clusters are considered good if the
cluster definitions stabilize, and the stabilized definitions prove useful for the
purpose at hand. Else, repeat the clustering exercise with a different number
of clusters, and different starting points for group means.
175
Clustering Exercise
Here is a simple exercise to visually and intuitive identify clusters from data.
X and Y are two dimensions of interest. The objective is to determine the
number of clusters, and the center points of those clusters.

X Y

2 4

2 6

5 6

4 7

8 3

6 6

5 2

5 7

6 3

4 4
A scatter plot of 10 items in 2 dimensions shows them distributed fairly

randomly. As a bottom-up technique, the number of clusters and their
centroids can be intuited (Figure 9.2).
176
Figure 9.2: Initial data points and the centroid (shown as thick dot)
The points are distributed randomly enough that it could be considered one
cluster. The solid circle would represent the central point (centroid) of these
points.
However, there is a big distance between the points (2,6) and (8,3). So, this
data could be broken into 2 clusters. The three points at the bottom right could
form one cluster and the other seven could form the other cluster. The two
clusters would look like this (Figure 9.3). The two circles will be the new
centroids.
Figure 9.3: Dividing into two clusters (centroids shown as thick dots)
The bigger cluster seems too far apart. So, it seems like the 4 points on the top
will form a separate cluster. The three clusters could look like this (Figure
177
9.4).
Figure 9.4: Dividing into three clusters (centroids shown as thick dots)
This solution has three clusters. The cluster on the right is far from the other
two clusters. However, its centroid is not too close to all the data points. The
cluster at the top looks very tight-fitting, with a nice centroid. The third
cluster, at the left, is spread out and may not be of much usefulness.
This was a bottom-up exercise in visually producing three best-fitting cluster

definitions from the given data. The right number of clusters will depend on
the data and the application for which the data would be used.
178
K-means is the most popular clustering algorithm. It iteratively computes the
clusters and their centroids. It is a top down approach to clustering. Starting
with a given number of K clusters, say 3 clusters. Thus three random
centroids will be created as starting points of the centers of three clusters. The
circles are initial cluster centroids (Figure 9.5).
Figure 9.5: Randomly assigning three centroids for three data clusters
Step 1: For a data point, distance values will be from each of the three
centroids. The data point will be assigned to the cluster with the shortest
distance to the centroid. All data points will thus, be assigned to one data
point or the other (Figure 9.6). The arrows from each data element shows the
centroid that the point is assigned to.
179
Figure 9.6: Assigning data points to closest centroid
Step 2: The centroid for each cluster will now be recalculated such that it is
closest to all the data points allocated to that cluster. The dashed arrows show
the centroids being moved from their old (shaded) values to the revised new
values (Figure 9.7).
Figure 9.7: Recomputing centroids for each cluster
Step 3: Once again, data points are assigned to the three centroids closest to it
(Figure 9.8).
Figure 9.8: Assigning data points to recomputed centroids
180
The new centroids will be computed from the data points in the cluster until
finally, the centroids stabilize in their locations. These are the three clusters
computed by this algorithm.
Figure 9.9: Recomputing centroids for each cluster till clusters stabilize
The three clusters shown are: a 3-datapoints cluster with centroid (6.5,4.5), a
2- datapoint cluster with centroid (4.5,3) and a 5-datapoint cluster with
centroid (3.5,3) (Figure 9.9).
These cluster definitions are different from the ones derived visually. This is a
function of the random starting centroid values. The centroid points used
earlier in the visual exercise were different from that chosen with the K-
means clustering algorithm. The K-means clustering exercise should
therefore, be run again with this data, but with new random centroid starting
values. With many runs, the cluster definitions are likely to stabilize. If the
cluster definitions do not stabilize, that may be a sign that the number of
clusters chosen is too high or too low. The algorithm should also be run with
different values of K.
181
182
The correct choice of the value of k is often ambiguous. It depends on the
shapeand scale of the distribution points in a data set and the desired
clustering resolution of the user. Heuristics are needed to pick the right
number. One can graph the percentage of variance explained by the clusters
against the number of clusters (Fig 9.10). The first clusters will add more
information (explain a lot of variance), but at some point the marginal gain in
variance will fall, giving a sharp angle to the graph, looking like an elbow.
Beyond that elbow point, adding more clusters will not add much incremental
value. That would be the desired K.
Figure 9.10: Elbow method for determining number of clusters in a data

set
To engage with the data and to understand the clusters better, it is often better
to start with a small number of clusters such as 2 or 3, depending upon the
data set and the application domain. The number can be increased
subsequently, as needed from an application point of view. This helps
understand the data and the clusters progressively better.
183
There are many advantages of K-Means Algorithm

1. K-Means algorithm is simple, easy to understand and easy to implement.

2. It is also efficient, in that the time taken to cluster k-means, rises linearly
with the number of data points.
3. No other clustering algorithm performs better than K-Means, in general.
There are a few disadvantages too:

1. The user needs to specify an initial value of K.

2. The process of finding the clusters may not converge.
3. It is not suitable for discovering clusters shapes that are not hyper-
ellipsoids (or hyper-spheres).
Neural networks can also be deployed for clustering, using the appropriate
objective function. The neural network will produce the appropriate cluster
centroids and cluster population for each cluster.
184
Conclusion
Cluster analysis is a useful, unsupervised learning technique that is used in
many business situations to segment the data into meaningful small groups.
K-Means algorithm is an easy statistical technique to iteratively segment the
data. However, there is only a heuristic technique to select the right number of
clusters.
185
Review Exercises
1: What is unsupervised learning? When is it used?
2: Describe three business applications in your industry where cluster analysis

will be useful.
3: Data about height and weight for a few volunteers is available. Create a set
of clusters for the following data, to decide how many sizes of T-shirts should
be ordered.

Height Weight

71 165

68 165

72 180

67 113

72 178

62 101

70 150

69 172

72 185

63 149

69 132

61 115
186
187
Liberty wants to find suitable
number of segments for its
customers, for targeted
marketing. Here is a list of
representative customers.

Income
Cust # of trans-actions Total Purchase ($)
($ K)

1 5 450 90

2 10 800 82

3 15 900 77

4 2 50 30

5 18 900 60

6 9 200 45

7 14 500 82

8 8 300 22

9 7 250 90

10 9 1000 80

11 1 30 60

12 6 700 80
1. What is the right number of clusters for Liberty?
188
2.What are their centroids for the clusters?
189
Associate rule mining is a popular, unsupervised learning technique, used in

business to help identify shopping patterns. It is also known as market basket
analysis. It helps find interesting relationships (affinities) between variables
(items or events). Thus, it can help cross-sell related items and increase the
size of a sale.
All data used in this technique is categorical . There is no dependent variable.

It uses machine learning algorithms. The fascinating “relationship between
sales of diapers and beers’ is how it is often explained in popular literature.
This technique accepts as input the raw point-of-sale transaction data. The
output produced is the description of the most frequent affinities among
items. An example of an association rule would be, “A Customer who bought
a flight tickets and a hotel reservation also bought a rental car plan 60 percent
of the time."
190
Netflix suggestions and
recommendation engines are
powered by a sutie of algorithms
using data about millions of
customer ratings about
thousands of movies. Most of
these algorithms are based on
the premise that similar viewing
patterns represent similar user
tastes. This suite of algorithms,
called CineMatch, instructs
Netflix's servers to process
information from its databases to
determine which movies a
customer is likely to enjoy. The
algorithm takes into account
many factors about the films
themselves, the customers'
ratings, and the combined
ratings of all Netflix users. The
company estimates that a
whopping 75 percent of viewer
activity is driven by
recommendations. According to
Netflix, these predictions were
valid around 75 percent of the
time and half of Netflix users
who rented CineMatch-
recommended movies gave them
a five-star rating.
To make matches, a computer

1. Searches the CineMatch database for people who have rated the same
movie - for example, "The Return of the Jedi".
2. Determines which of those people have also rated a second movie, such
as "The Matrix".
3. Calculates the statistical likelihood that people who liked "Return of the
Jedi" will also like "The Matrix".
191
4. Continues this process to establish a pattern of correlations between
subscribers' ratings of many different films.
Netflix launched a contest in

2006 to find an algorithm that
could beat CineMatch. The
contest, called the Netflix Prize,
promised $1 million to the first
person or team to meet the
accuracy goals for
recommending movies based on
users' personal preferences.
Each of these algorithm
submissions was required to
demonstrate a 10 percent
improvement over CineMatch.
Three years later, the $1 million
prize was awarded to a team of
seven people. (source:
http://electronics.howstuffworks.com
1: Are Netflix customers being

manipulated into seeing what
Netflix wants them to see?
2: Compare this story with

Amazon’s personalization
engine.
192
In business environments a pattern or knowledge can be used for many
purposes. In sales and marketing, it is used for cross-marketing and cross-
selling, catalog design, e-commerce site design, online advertising
optimization, product pricing, and sales/promotion configurations. This
analysis can suggest not to put one item on sale at a time, and instead to create
a bundle of products promoted as a package to sell other non-selling items.
In retail environments, it can be used for store design. Strongly associated

items can be kept close tougher for customer convenience. Or they could be
placed far from each other so that the customer has to walk the aisles and by
doing so is potentially exposed to other items.
In medicine, this technique can be used for relationships between symptoms

and illnesses; diagnosis and patient characteristics/treatments; genes and their
functions; etc.
193
A generic Association Rule is represented between a set X and Y: XÞ 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 in the dataset – i.e. P (X U Y)
C: Confidence: how often Y is found, given X – i.e. P (Y ǀ X)
Example: {Hotel booking, Flight booking}Þ {Rental Car} [30%, 60%]
[Note: P (X) is the mathematical representation of the the probability or

chance of X occurring in the data set.}
Computation example:
Suppose there are 1000 transactions in a data set. There are 300 occurrences
of X, and 150 occurrences of (X,Y) in the data set.
Support S for XÞ Y will be P(X U Y) = 150/1000 = 15%.
Confidence for XÞ Y will be P (Y ǀ X); or P (X U Y) / P (X) = 150/300 = 50%
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Not all association rules are interesting and useful, only those that are strong
rules and also those that occur frequently. In association rule mining, the goal
is to find all rules that satisfy the user-specified minimum support and
minimum confidence. The resulting sets of rules are all the same irrespective
of the algorithm used, that is, given a transaction data set T, a minimum
support and a minimum confidence, the set of association rules existing in T
is uniquely determined.
Fortunately, there is a large number of algorithms that are available for

generating association rules. The most popular algorithms are Apriori, Eclat,
FP-Growth, along with various derivatives and hybrids of the three. All the
algorithms help identify the frequent item sets, which are then converted to
association rules.
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Apriori Algorithm
This is the most popular algorithm used for association rule mining. The
objective is to find subsets that are common to at least a minimum number of
the itemsets. A frequent itemset is an itemset whose support is greater than or
equal to minimum support threshold. The Apriori property is a downward
closure property, which means that any subsets of a frequent itemset are also
frequent itemsets. Thus, if (A,B,C,D) is a frequent itemset, then any subset
such as (A,B,C) or (B,D) are also frequent itemsets.
It uses a bottom-up approach; and the size of frequent subsets is gradually

increased, 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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Here are a dozen sales transactions. There are six products being sold: Milk,
Bread, Butter, Eggs, Cookies, and Ketchup. Transaction#1 sold Milk, Eggs,
Bread and Butter. Transaction#2 sold Milk, Butter, Egg & Ketchup. And so
on. The objective is to use this transaction data to find affinities between
products, i.e. which products sell together often.
The support level will be set at 33 percent; the confidence level will be set at
50 percent. That means that we have decided to consider rules from only
those itemsets that occur at least 33 percent of the time in the total set of
transactions. Confidence level means that within those itemsets, the rules of
the form X → Y should be such that there is at least 50 percent chance of Y
occurring based on X occurring.

Transactions List

1 Milk Egg Bread Butter

2 Milk Butter Egg Ketchup

3 Bread Butter Ketchup

4 Milk Bread Butter

5 Bread Butter Cookies

6 Milk Bread Butter Cookies

7 Milk Cookies

8 Milk Bread Butter

9 Bread Butter Egg Cookies

10 Milk Butter Bread

11 Milk Bread Butter
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12 Milk Bread Cookies Ketchup
First step is to compute 1-item Itemsets. i.e. How often does any product
individually sell.

1-item Sets Freq

Milk 9

Bread 10

Butter 10

Egg 3

Ketchup 3

Cookies 5
Thus, Milk sells in 9 out of 12 transactions. Bread sells in 10 out of 12

transactions. And so on.
At every point, there is an opportunity to select itemsets of interest, and thus

further analysis. Other itemsets that occur very infrequently may be removed.
If itemsets that occur 4 or more times out of 12 are selected, that corresponds
to meeting a minimum support level of 33 percent (4 out of 12). Only 4 items
make the cut. The frequent items that meet the support level of 33 percent are:

Frequent 1-item Sets Freq

Milk 9

Bread 10
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Butter 10

Cookies 5
The next step is to go for the next level of itemsets using items selected
earlier: 2-item itemsets.

2-item Sets Freq

Milk, Bread 7

Milk, Butter 7

Milk, Cookies 3

Bread, Butter 9

Butter, Cookies 3

Bread, Cookies 4
Thus (Milk, Bread) sell 7 times out of 12. (Milk, Butter) sell together 7 times,
(Bread, Butter sell) together 9 times, and (Bread, Cookies) sell 4 times.
However only four of these transactions meet the minimum support level of
33%.

2-item Sets Freq

Milk, Bread 7

Milk, Butter 7

Bread, Butter 9

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Bread, Cookies 4
The next step is to list the next higher level of itemsets: 3-item itemsets.

3-item Sets Freq

Milk, Bread, Butter 6

Milk, Bread, Cookies 1

Bread, Butter, Cookies 3
Thus (Milk, Bread, Butter) sell 6 times out of 12. (Bread, Butter, Cookies) sell
3 times out of 12. One one 3-item itemset meets the minimum support
requirements.

3-item Sets Freq

There is no room to create a 4-item itemset for this support level.
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The most interesting and complex rules at higher size itemsets start top-down
with the most frequent itemsets of higher size-numbers. Association rules are
created that meet the support level (>33%) and confidence levels (> 50%).
The highest level itemset that meets the support requirements is the three-item
itemset. The following itemset has a support level of 50% (6 out of 12).

This itemset could lead to multiple candidate Association rules.
Start with the following rule: (Bread, Butter) Milk.
There are a total of total 12 transactions.
X (in this case Bread, Butter) occurs 9 times;
X,Y (in this case Bread, Butter, Milk) occurs 6 times.
The support level for this rule is 6/12 = 50%. The confidence level for this
rule is 6/9 = 67%. This rule meets our thresholds for support (>33%) and
confidence (>50%).
Thus, the first valid Association rule from this data is: (Bread, Butter)Milk
{S=50%, C=67%}.
In exactly the same way, other rules can be considered for their validity.
Consider the rule: (Milk, Bread) Butter. Out of total 12 transactions, (Milk,
Bread) occur 7 times; and (Milk, Bread, Butter) occurs 6 times.
confidence (>50%).
Thus, the second valid Association rule from this data is (Milk, Bread)Butter
{S=50%, C=67%}.
Consider the rule (Milk, Butter)Bread. Out of total 12 transactions (Milk,
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Butter) occurs 7 times while (Milk, Butter, Bread) occur 6 times.
confidence (>50%).
Thus, the next valid Association rule is: Milk,Butter Bread {S=50%,
C=84%}.
Thus, there were only three possible rules at the 3-item itemset level, and all
were found to be valid.
One can get to the next lower level and generate association rules at the 2-
item itemset level.
Consider the rule Milk Bread. Out of total 12 transactions Milk occurs 9
times while (Milk, Bread) occur 7 times.
confidence (>50%).
Thus, the next valid Association rule is:
Milk -> Bread {58%, 77%}.
Many such rules could be derived if needed.
Not all such association rules are interesting. The client may be interested in
only the top few rules that they want to implement. The number of association
rules depends upon business need. Implementing every rule in business will
require some cost and effort, with some potential of gains. The strongest of
rules, with the higher support and confidence rates, should be used first, and
the others should be progressively implemented later.
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Conclusion
Association Rules help discover affinities between products in transactions. It
helps make cross-selling recommendations much more targeted and effective.
Apriori technique is the most popular technique, and it is a machine learning
technique.
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Review Exercises
Q1: What are association rules? How do they help?
Q2: How many association rules should be used?
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Here is a list of Transactions from Liberty’s stores. Create association rules
for the following data. With 33% support level and 66% confidence.

1 A B C

2 B E F

3 A C E

4 B C F

5 A C E

6 C F G

7 A D F

8 D E F

9 A B D

10 A B C

11 B D E

12 A C D
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Section 3

This section covers some additional topics.
Chapter 11 will cover Text Mining, the art and science of generating insights
from text. It is very important in the age of social media.
Chapter 12 will cover Web Mining, the art and science of generating insights
from the world-wide web, its content and usage. It is very important in the
digital age where a lot of advertising and selling is moving to the web.
Chapter 13 will cover Big Data. This is a new moniker created to describe the
phenomenon of large amounts of data being generated from many data
sources, and which cannot be handled with the traditional data management
tools.
Chapter 14 will cover a primer on Data Modeling. This is useful as a ramp-up

to data mining, especially for those who have not had much exposure to
traditional data management or may need a refresher.
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Text mining is the art and science of discovering knowledge, insights and
patterns from an organized collection of textual databases. Textual mining can
help with frequency analysis of important terms, and their semantic
relationships.
Text is an important part of the growing data in the world. Social media
technologies have enabled users to become producers of text and images and
other kinds of information. Text mining can be applied to large-scale social
media data for gathering preferences, and measuring emotional sentiments. It
can also be applied to societal, organizational and individual scales.
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Do you think that what you post on social media
remains private? Think again. A new dashboard shows
how much personal information is out there, and how
companies are able to construct ways to make use of it
for commercial benefits. Here is a dashboard of
conversations between two people Jennifer and Nicole
over 45 days.
There is a variety of categories that Nicole and

Jennifer speak about such as computers, politics,
laundry, desserts. The polarity of Jennifer’s personal
thoughts and tone is overwhelmingly positive, and
Jennifer responds to Nicole much more than vice versa,
identifying Nicole as the influencer in their
relationship.
The data visualization reveals the waking hours of

Jennifer, showing that she is most active around
8:00pm and heads to bed around midnight. 53% of her
conversation is about food – and 15% about desserts .
Maybe she’s a strategic person to push restaurant or
weight loss ads.
The most intimate detail exposed during this

conversation is that Nicole and Jennifer discuss right
wing populism, radical parties, and conservative
politics. It exemplifies that the amount of private
information obtained from your WhatsApp
conversations is limitless and potentially dangerous.
WhatsApp is the world’s largest messaging service that

has over 450 million users. FaceBook recently bought
this three year old company for a whopping $19
billion. People share a lot of sensitive personal
information on WhatsApp that they may not even share
with their family members.
(Sources: What Facebook Knows About You From One

WhatsApp Conv, by Adi Azaria, on Linked In, April 10,
2014).

1: What are the business and social implications of this
kind of analysis?
2: Are you worried? Should you be worried?

Text mining works on texts from practically any kind of sources from any
business or non-business domains, in any formats including Word documents,
PDF files, XML files, text messages, etc. Here are some representative
examples:

1. In the legal profession, text sources would include law, court

deliberations, court orders, etc.
2. In academic research, it would include texts of interviews, published
research articles, etc.
3. The world of finance will include statutory reports, internal reports, CFO
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statements, and more.
4. In medicine, it would include medical journals, patient histories,
discharge summaries, etc.
5. In marketing, it would include advertisements, customer comments, etc.
6. In the world of technology and search, it would include patent
applications, the whole of information on the world-wide web, and more.
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Text mining is a useful tool in the hands of chief knowledge officers to extract
knowledge relevant to an organization. Text mining can be used across
industry sectors and application areas, including decision support, sentiment
analysis, fraud detection, survey analysis, and many more.

1. Marketing: The voice of the customer can be captured in its native and
raw format and then analyzed for customer preferences and complaints.
1. Social personas are a clustering technique to develop customer
segments of interest. Consumer input from social media sources,
such as reviews, blogs, and tweets, contain numerous leading
indicators that can be used towards anticipating and predicting
consumer behavior.
2. A ‘listening platform’ is a text mining application, that in real time,
gathers social media, blogs, and other textual feedback, and filters
out the chatter to extract true consumer sentiment. The insights can
lead to more effective product marketing and better customer
service.
3. The customer call center conversations and records can be analyzed
for patterns of customer complaints. Decision trees can organize
this data to create decision choices that could help with product
management activities and to become proactive in avoiding those
complaints.
2. Business operations: Many aspects of business functioning can be

accurately gauged from analyzing text./
1. Social network analysis and text mining can be applied to emails,
blogs, social media and other data to measure the emotional states
and the mood of employee populations. Sentiment analysis can
reveal early signs of employee dissatisfaction which can then can be
proactively managed.
2. Studying people as emotional investors and using text analysis of
the social Internet to measure mass psychology can help in
obtaining superior investment returns.
3. Legal: In legal applications, lawyers and paralegals can more easily

search case histories and laws for relevant documents in a particular case
to improve their chances of winning.
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1. Text mining is also embedded in e-discovery platforms that help in
minimizing risk in the process of sharing legally mandated
documents.
2. Case histories, testimonies, and client meeting notes can reveal
additional information, such as morbidities in a healthcare situation
that can help better predict high-cost injuries and prevent costs.
4. Governance and Politics: Governments can be overturned based on a

tweet originating from a self-immolating fruit-vendor in Tunisia.
1. Social network analysis and text mining of large-scale social media
data can be used for measuring the emotional states and the mood
of constituent populations. Micro-targeting constituents with
specific messages gleaned from social media analysis can be a more
efficient use of resources when fighting democratic elections.
2. In geopolitical security, internet chatter can be processed for real-
time information and to connect the dots on any emerging threats.
3. In academic, research streams could be meta-analyzed for
underlying research trends.
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Text Mining Process
Text Mining is a rapidly evolving area of research. As the amount of social
media and other text data grows, there is need for efficient abstraction and
categorization of meaningful information from the text.
The first level of analysis is identifying frequent words. This creates a bag of
important words. Texts – documents or smaller messages – can then be
ranked on how they match to a particular bag-of-words. However, there are
challenges with this approach. For example, the words may be spelled a little
differently. Or there may be different words with similar meanings.
The next level is at the level of identifying meaningful phrases from words.
Thus ‘ice’ and ‘cream’ will be two different key words that often come
together. However, there is a more meaningful phrase by combining the two
words into ‘ice cream’. There might be similarly meaningful phrases like
‘Apple Pie’.
The next higher level is that of Topics. Multiple phrases could be combined
into Topic area. Thus the two phrases above could be put into a common
basket, and this bucket could be called ‘Desserts’.
Text mining is a semi-automated process. Text data needs to be gathered,

structured, and then mined, in a 3-step process (Figure 11.1)
Figure 11.1: Text Mining Architecture

1. The text and documents are first gathered into a corpus, and organized.
2. The corpus is then analyzed for structure. The result is a matrix mapping
important terms to source documents.
3. The structured data is then analyzed for word structures, sequences, and
frequency.
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213
This is the heart of the structuring process. Free flowing text can be
transformed into numeric data in a TDM, which can then be mined using
regular data mining techniques.

1. There are several efficient techniques for identifying key terms from a
text. There are less efficient techniques available for creating topics out
of them. For the purpose of this discussion, one could call key words,
phrases or topics as a term of interest. This approach measures the
frequencies of select important terms occurring in each document. This
creates a t x d Term–by–Document Matrix (TDM) where t is the number
of terms and d is the number of documents (Table 11.1).
2. Creating a TDM requires making choices of which terms to include. The
terms chosen should reflect the stated purpose of the text mining
exercise. The list of terms should be as extensive as needed, but should
not include unnecessary stuff that will serve to confuse the analysis, or
slow the computation.


Document / Terms investment Profit happy Success …

Doc 1 10 4 3 4

Doc 2 7 2 2

Doc 3 2 6

Doc 4 1 5 3

Doc 5 6 2

Doc 6 4 2

…
Table 11.1: Term-Document Matrix
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Here are some considerations in creating a TDM.

1. A large collection of documents mapped to a large bag of words will
likely lead to a very sparse matrix if they have few common words.
Reducing dimensionality of data will help improve the speed of analysis
and meaningfulness of the results. Synonyms, or terms will similar
meaning, should be combined and should be counted together, as a
common term. This would help reduce the number of distinct terms of
words or ‘tokens’.
2. Data should be cleaned for spelling errors. Common spelling errors
should be ignored and the terms should be combined. Uppercase-
lowercase terms should also be combined.
3. When many variants of the same term are used, just the stem of the word
would be used to reduce the number of terms. For instance, terms like
customer order, ordering, order data, should be combined into a single
token word, called ‘Order’.
4. On the other side, homonyms (terms with the same spelling but different
meanings) should be counted separately. This would enhance the quality
of analysis. For example, the term order can mean a customer order, or
the ranking of certain choices. These two should be treated separately.
“The boss ordered that the customer orders data analysis be presented in
chronological order’. This statement shows three different meanings for
the word ‘order’. Thus, there will be a need for a manual review of the
TD matrix.
5. Terms with very few occurrences in very few documents should be
eliminated from the matrix. This would help increase the density of the
matrix and the quality of analysis.
6. The measures in each cell of the matrix could be one of several
possibilities. It could be a simple count of the number of occurrences of
each term in a document. It could also be the log of that number. It could
be the fraction number computed by dividing the frequency count by the
total number of words in the document. Or there may be binary values in
the matrix to represent whether a term is mentioned or not. The choice of
value in the cells will depend upon the purpose of the text analysis.
At the end of this analysis and cleansing, a well-formed, densely populated,

rectangular, TDM will be ready for analysis. The TDM could be mined using
all the available data mining techniques.
215
216
Mining the TDM
The TDM can be mined to extract patterns/knowledge. A variety of
techniques could be applied to the TDM to extract new knowledge.
Predictors of desirable terms could be discovered through predictive

techniques, such as regression analysis. Suppose the word profit is a desirable
word in a document. The number of occurrences of the word profit in a
document could be regressed against many other terms in the TDM. The
relative strengths of the coefficients of various predictor variables would
show the relative impact of those terms on creating a profit discussion.
Predicting the chances of a document being liked is another form of analysis.

For example, important speeches made by the CEO or the CFO to investors
could be evaluated for quality. If the classification of those documents (such
as good or poor speeches) was available, then the terms of TDM could be
used to predict the speech class. A decision tree could be constructed that
makes a simple tree with a few decision points that predicts the success of a
speech 80 percent of the time. This tree could be trained with more data to
become better over time.
Clustering techniques can help categorize documents by common profile. For

example, documents containing the words investment and profit more often
could be bundled together. Similarly, documents containing the words,
customer orders and marketing, more often could be bundled together. Thus, a
few strongly demarcated bundles could capture the essence of the entire
TDM. These bundles could thus help with further processing, such as handing
over select documents to others for legal discovery.
Association rule analysis could show relationships of coexistence. Thus, one

could say that the words, tasty and sweet, occur together often (say 5 percent
of the time); and further, when these two words are present, 70 percent of the
time, the word happy, is also present in the document.
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Text Mining is a form of data mining. There are many common elements
between Text and Data Mining. However, there are some key differences
(Table 11.2). The key difference is that text mining requires conversion of text
data into frequency data, before data mining techniques can be applied.

Dimension Text Mining Data Mining

Nature of Unstructured data: Words, Numbers; alphabetical and
data phrases, sentences logical values

Many languages and dialects used
Language in the world; Similar numerical systems
used many languages are extinct, new across the world
documents are discovered

Sentences can be ambiguous;
Clarity and
sentiment may contradict the Numbers are precise.
precision
words

Different parts of data can

Different parts of the text can be inconsistent, thus,
Consistency
contradict each other requiring statistical
significance analysis

Text may present a clear and

consistent or mixed sentiment,
Sentiment Not applicable
across a continuum. Spoken words
adds further sentiment

Spelling errors. Differing values

of proper nouns such as names. Issues with missing
Quality
Varying quality of language values, outliers, etc
translation

A full wide range of
Keyword based search; co- statistical and machine
Nature of existence of themes; Sentiment learning analysis for
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mining; relationships and
differences
Table 11.2: Comparing Text Mining and Data Mining
219
Many of the best practices that apply to the use of data mining techniques will
also apply to text mining.

1. The first and most important practice is to ask the right question. A good
question is one which gives an answer and would lead to large payoffs
for the organization. The purpose and the key question will define how
and at what levels of granularity the TDM would be made. For example,
TDM defined for simpler searches would be different from those used
for complex semantic analysis or network analysis.
2. A second important practice is to be creative and open in proposing
imaginative hypotheses for the solution. Thinking outside the box is
important, both in the quality of the proposed solution as well as in
finding the high quality data sets required to test the hypothesized
solution. For example, a TDM of consumer sentiment data should be
combined with customer order data in order to develop a comprehensive
view of customer behavior. It’s important to assemble a team that has a
healthy mix of technical and business skills.
3. Another important element is to pursue the problem iteratively. Too
much data can overwhelm the infrastructure and also befuddle the mind.
It is better to divide and conquer the problem with a simpler TDM, with
fewer terms and fewer documents and data sources. Expand as needed,
in an iterative sequence of steps. In the future, add new terms to help
improve predictive accuracy.
4. A variety of data mining tools should be used to test the relationships in
the TDM. Different decision tree algorithms could be run alongside
cluster analysis and other techniques. Triangulating the findings with
multiple techniques, and many what-if scenarios, helps build confidence
in the solution. Test the solution in many ways before committing to
deploy it.
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Conclusion
Text Mining is diving into the unstructured text to discover valuable insights
about the business. The text is gathered and then structured into a term-
document matrix based on the frequency of a bag of words in a corpus of
documents. The TDM can then be mined for useful, novel patterns, and
insights. While the technique is important, the business objective should be
well understood and should always be kept in mind.
***
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Review Questions
1: Why is text mining useful in the age of social media?
2: What kinds of problems can be addressed using text mining?
3: What kinds of sentiments can be found in the text?
Do a Text mining analysis of sales speeches by three salesmen.

1. Did you know your team can build Powerpoint muscles? Yes, I help build
PowerPoint muscles. I teach people how to use PowerPoint more
effectively in business. Now, for instance, I’m working with a global
consulting firm to train all their senior consultants to give better sales
presentations so they can close more business.
2. I train people how to make sure their PowerPoint slides aren’t a
complete disaster. Those who attend my workshop can create slides that
are 50% more clear and 50% more convincing by the end of the training,
based on scores students give each other before and after the workshop.
I’m not sure if my training could work at your company. But I’d be
happy to talk to you about it.
3. You know how most business people use PowerPoint but most use it
pretty poorly? Well, bad PowerPoint has all kinds of consequences –
sales that don’t close, good ideas that get ignored, time wasted building
slides that could have been used developing or executing strategies. My
company shows businesses how to use PowerPoint to capture those
sales, bring attention to those great ideas and use those wasted hours on
more important projects.
The purpose is to select the best speech.
1: How would you select the right bag of words?
2: If speech #1 was the best speech, use the TDM to create a rule for good
speeches.

Here are a few comments from customer service calls received by Liberty.

1. I loved the design of the shirt. The size fitted me very well. However, the fabric seemed flimsy. I am calling to see if you
222
can replace the shirt with a different one. Or please refund my money.
2. I was running late from work, and I stopped by to pick up some groceries. I did not like the way the manager closed the
store while I was still shopping.
3. I stopped by to pick up flowers. The checkout line was very long. The manager was polite but did not open new cashiers. I
got late for my appointment.
4. The manager promised that the product will be there, but when I went there the product was not there. The visit was a
waste. The manager should have compensated me for my trouble.
5. When there was a problem with my catering order, the store manager promptly contacted me and quickly got the kinks out
to send me replacement food immediately. There are very courteous.
Create a TDM with not more than 6 key terms. [Hint: Treat each comment as a document]
223

Web mining is the art and science of discovering patterns and insights from
the World-wide web so as to improve it. The world-wide web is at the heart of the
digital revolution. More data is posted on the web every day than was there on
the whole web just 20 years ago. Billions of users are using it every day for a
variety of purposes. The web is used for electronic commerce, business
communication, and many other applications. Web mining analyzes data from
the web and helps find insights that could optimize the web content and
improve the user experience. Data for web mining is collected via Web
crawlers, web logs, and other means.
Here are some characteristics of optimized websites:

1. Appearance: Aesthetic design. Well-formatted content, easy to scan and

navigate. Good color contrasts.
2. Content: Well planned information architecture with useful content.
Fresh content. Search-engine optimized. Links to other good sites.
3. Functionality: Accessible to all authorized users. Fast loading times.
Usable forms. Mobile enabled.
This type of content and its structure is of interest to ensure the web is easy to
use. The analysis of web usage provides feedback on the web content, and
also the consumer’s browsing habits. This data can be of immense use for
commercial advertising, and even for social engineering.
The web could be analyzed for its structure as well as content. The usage
pattern of web pages could also be analyzed. Depending upon objectives, web
mining can be divided into three different types: Web usage mining, Web
content mining and Web structure mining (Figure 12.1).
224
Figure: 12.1 Web Mining structure
225
Web content mining
A website is designed in the form of pages with a distinct URL (universal
resource locator). A large website may contain thousands of pages. These
pages and their content is managed using specialized software systems called
Content Management Systems. Every page can have text, graphics, audio,
video, forms, applications, and more kinds of content including user
generated content.
The websites keep a record of all requests received for its page/URLs,
including the requester information using ‘cookies’. The log of these requests
could be analyzed to gauge the popularity of those pages among different
segments of the population. The text and application content on the pages
could be analyzed for its usage by visit counts. The pages on a website
themselves could be analyzed for quality of content that attracts most users.
Thus the unwanted or unpopular pages could be weeded out, or they can be
transformed with different content and style. Similarly, more resources could
be assigned to keep the more popular pages more fresh and inviting.
226
The Web works through a system of hyperlinks using the hypertext protocol
(http). Any page can create a hyperlink to any other page, it can be linked to
by another page. The intertwined or self-referral nature of web lends itself to
some unique network analytical algorithms. The structure of Web pages could
also be analyzed to examine the pattern of hyperlinks among pages. There
are two basic strategic models for successful websites: Hubs and Authorities.

1. Hubs: These are pages with a large number of interesting links. They
serve as a hub, or a gathering point, where people visit to access a
variety of information. Media sites like Yahoo.com, or government sites
would serve that purpose. More focused sites like Traveladvisor.com and
yelp.com could aspire to becoming hubs for new emerging areas.
2. Authorities: Ultimately, people would gravitate towards pages that
provide the most complete and authoritative information on a particular
subject. This could be factual information, news, advice, user reviews
etc. These websites would have the most number of inbound links from
other websites. Thus Mayoclinic.com would serve as an authoritative
page for expert medical opinion. NYtimes.com would serve as an
authoritative page for daily news.
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Web usage mining
As a user clicks anywhere on a webpage or application, the action is recorded
by many entities in many locations. The browser at the client machine will
record the click, and the web server providing the content would also make a
record of the pages served and the user activity on those pages. The entities
between the client and the server, such as the router, proxy server, or ad
server, too would record that click.
The goal of web usage mining is to extract useful information and patterns
from data generated through Web page visits and transactions. The activity
data comes from data stored in server access logs, referrer logs, agent logs,
and client-side cookies. The user characteristics and usage profiles are also
gathered directly, or indirectly, through syndicated data. Further, metadata,
such as page attributes, content attributes, and usage data are also gathered.
The web content could be analyzed at multiple levels (Figure 12.2).

1. The server side analysis would show the relative popularity of the web
pages accessed. Those websites could be hubs and authorities.
2. The client side analysis could focus on the usage pattern or the actual
content consumed and created by users.
1. Usage pattern could be analyzed using ‘clickstream’ analysis, i.e.
analyzing web activity for patterns of sequence of clicks, and the
location and duration of visits on websites. Clickstream analysis can
be useful for web activity analysis, software testing, market
research, and analyzing employee productivity.
2. Textual information accessed on the pages retrieved by users could
be analyzed using text mining techniques. The text would be
gathered and structured using the bag-of-words technique to build a
Term-document matrix. This matrix could then be mined using
cluster analysis and association rules for patterns such as popular
topics, user segmentation, and sentiment analysis.
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Figure: 12.2 Web Usage Mining architecture
Web usage mining has many business applications. It can help predict user
behavior based on previously learned rules and users' profiles, and can help
determine lifetime value of clients. It can also help design cross-marketing
strategies across products, by observing association rules among the pages on
the website. Web usage can help evaluate promotional campaigns and see if
the users were attracted to the website and used the pages relevant to the
campaign. Web usage mining could be used to present dynamic information
to users based on their interests and profiles. This includes targeted online ads
and coupons at user groups based on user access patterns.
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Hyperlink-Induced Topic Search (HITS) is a link analysis algorithm that rates
web pages as being hubs or authorities. Many other HITS-based algorithms
have also been published. The most famous and powerful of these algorithms
is the PageRank algorithm. Invented by Google co-founder Larry Page, this
algorithm is used by Google to organize the results of its search function. This
algorithm helps determine the relative importance of any particular web page
by counting the number and quality of links to a page. The websites with
more number of links, and/or more links from higher-quality websites, will be
ranked higher. It works in a similar way as determining the status of a person
in a society of people. Those with relations to more people and/or relations to
people of higher status will be accorded a higher status.
PageRank is the algorithm that helps determine the order of pages listed upon
a Google Search query. The original PageRank algorithm formuation has been
updated in many ways and the latest algorithm is kept a secret so other
websites cannot take advantage of the algorithm and manipulate their website
according to it. However, there are many standard elements that remain
unchanged. These elements lead to the principles for a good website. This
process is also called Search Engine Optimization (SEO).
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Conclusion
The web has growing resources, with more content everyday and more users
visiting it for many purposes. A good website should be useful, easy to use,
and flexible for evolution. From the insights gleaned using web mining,
websites should be constantly optimized.
Web usage mining can help discover what content users really like and
consume, and help prioritize that for improvement. Web structure can help
improve traffic to those sites, by building authority for the sites.
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Review Questions
1: What are the three types of web mining?
2: What is clickstream analysis?
3: What are the two major ways that a website can become popular?
4: What are the privacy issues in web mining?
5: A user spends 60 minutes on the web, visiting 10 webpages in all. Given

the clickstream data, what kind of an analysis would you do?
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Big data is an umbrella term for a collection of data sets so large and complex
that it becomes difficult to process them using traditional data management
tools. There has been increasing democratization of the process of content
creation and sharing over the Internet, using social media applications. The
combination of cloud-based storage, social media applications, and mobile
access devices is helping crystallize the big data phenomenon. The leading
management consulting firm, McKinsey & Co. created a flutter when it
published a report in 2011 showing a huge impact of such big data on
business and other organizations. They also reported that there will be
millions of new jobs in the next decade, related to the use of big data in many
industries.
Big data can be used to discover new insights from a 360-degree view of a
situation that can allow for a complete new perspective on situations, new
models of reality, and potentially new types of solutions. It can help spot
business trends and opportunities. For example, Google is able to predict the
spread of a disease by tracking the use of search terms related to the
symptoms of the disease over the globe in real time. Big Data can help
determine the quality of research, prevent diseases, link legal citations,
combat crime, and determine real-time roadway traffic conditions. Big Data
is enabling evidence-based medicine, and many other innovations.
Data has become the new natural resource. Organizations have a choice in
how to engage with this exponentially growing volume, variety and velocity
of data. They can choose to be buried under the avalanche, or they can choose
to use it for competitive advantage. Challenges in big data include the entire
range of operations from capture, curation, storage, search, sharing, analysis,
and visualization. Big data is more valuable when analyzed as a whole. More
and more information is derivable from analysis of a single large set of related
data, as compared to separate smaller sets. However, special tools and skills
are needed to manage such extremely large data sets.
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Caselet: Personalized
Promotions at Sears
A couple of years ago, Sears
Holdings came to the conclusion
that it needed to generate
greater value from the huge
amounts of customer, product,
and promotion data it collected
from its many brands. Sears
required about eight weeks to
generate personalized
promotions, at which point many
of them were no longer optimal
for the company. It took so long
mainly because the data required
for these large-scale analyses
were both voluminous and highly
fragmented—housed in many
databases and “data
warehouses” maintained by the
various brands. Sears turned to
the technologies and practices of
big data. As one of its first steps,
it set up a Hadoop cluster, using
a group of inexpensive
commodity servers.
Sears started using the Hadoop

cluster to store incoming data
from all its brands and from
existing data warehouses. It then
conducted analyses on the
cluster directly, avoiding the
time-consuming complexities of
pulling data from various
sources and combining them so
that they can be analyzed.
Sears’s Hadoop cluster stores
and processes several petabytes
of data at a fraction of the cost
of a comparable standard data
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warehouse. The time needed to
generate a comprehensive set of
promotions dropped from eight
weeks to one. And these
promotions are of higher quality,
because they’re more timely,
more granular, and more
personalized. (Source: McAfee
& Brynjolfsson HBS Oct 2012)
1: What are other ways in which

Sears can benefit from Big
Data?
2: What are the challenges in

making use of Big Data?
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Defining Big Data
In 2000, there were 800,000 Petabytes of data in the world. It is expected to
grow to 35 zettabytes by the year 2020. About a million books worth of data
is being created daily on social media alone. Big Data is big, fast,
unstructured, and of many types. There are several unique features:

1. Variety: There are many types of data, including structured and

unstructured data. Structured data consists of numeric and text fields.
Unstructured data includes images, video, audio, and many other types.
There are also many sources of data. The traditional sources of
structured data include data from ERPs systems and other operational
systems. Sources for unstructured data include social media, Web, RFID,
machine data, and others. Unstructured data comes in a variety of sizes,
resolutions, and are subject to different kinds of analysis. For example,
video files can be tagged with labels, and they can be played, but video
data is typically not computed, which is the same with audio data.
Graphic data can be analyzed for network distances. Facebook texts and
tweets can be analyzed for sentiments, but cannot be directly compared.
2. Velocity: The Internet greatly increases the speed of movement of data,
from e-mails to social media to video files, data can move quickly.
Cloud-based storage makes sharing instantaneous, and easily accessible
from anywhere. Social media applications enable people to share their
data with each other instantly. Mobile access to these applications also
speeds up the generation and access to data (Figure 13.1).
Figure 13.1 Sources of Big Data (Source: Hortonworks.com)

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3. Volume: Websites have become great sourced and repositories for many
kinds of data. User clickstreams are recorded and stored for future use.
Social media applications such as Facebook, Twitter, Pinterest, and other
applications have enabled users to become prosumers of data (producers
and consumers). There is an increase in the number of data shares, and
also the size of each data element. High-definition videos can increase
the total shared data. There are autonomous data streams of video, audio,
text, data, and so on coming from social media sites, websites, RFID
applications, and so on.
4. Sources of Data: There are several sources of data, including some new
ones. Data from outside the organization may be incomplete, and of a
different quality and accuracy.

1. Social Media: All activities on the web and social media are
considered stores and are accessible. Email was the first major
source of new data. Google searches, Facebook posts, Tweets,
Youtube videos, and blogs enable people to generate data for one
another.
2. Organizations: Business organizations and government are a major

source of data. ERP systems, e-Commerce systems, user-generated
content, web-access logs, and many other sources of data generate
valuable data for organizations.
3. Machines: The Internet of things is evolving. Many machines are

connected to the web and autonomously generate data that is
untouched by humans. RFID tags and telematics are two major
applications that generate enormous amounts of data. Connected
devices such as phones and refrigerators generate data about their
location and status.
4. Metadata: There is enormous data about data itself. Web crawlers

and web-bots scan the web to capture new webpages, their html
structure, and their metadata. This data is used by many
applications, including web search engines.
The data also includes varied quality of data. It depends upon the purpose of
collecting the data, and how carefully it has been collected and curated. Data
from within the organization is likely to be of a higher quality. Publicly
available data would include some trustworthy data such as from the
government.
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238
Big Data Landscape
Big data can be understood at many levels (Figure 13.2). At the highest level
are business applications to suit particular industries or to suit business
intelligence for executives. A unique concept of “data as a service” is also
possible for particular industries. At the next level, there are infrastructure
elements for broad cross-industry applications, such as analytics and
structured databases. This also includes offering this infrastructure as a
service with some operational management services built in. At the core, big
data is about technologies and standards to store and manipulate the large fast
streams of data, and make them available for rapid data-based decision-
making.

Figure 13.2 The Big Data Landscape (source: bigdatalandscape.com)
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“Big data will disrupt your
business. Your actions will
determine whether these
disruptions are positive or
negative.” (Gartner, 2012).
Any industry that produces information-based products is most likely to be

disrupted. Thus, the newspaper industry has taken a hit from digital
distribution channels, as well as from published-on-web-only blogs.
Entertainment has also been impacted by digital distribution and piracy, as
well as by user-generated-and-uploaded content on the internet. The education
industry is being disrupted by massively on-line open courses (MOOCs) and
user-uploaded content. Health care delivery is impacted by electronic health
records and digital medicine. The retail industry has been highly disrupted by
ecommerce companies. Fashion companies are impacted by quick feedback
on their designs on social media. The banking industry has been impacted by
the cost-effective online self-serve banking applications and this will impact
employment levels in the industry.
There is rapid change in business models enabled by big data technologies.

Steve Jobs, the ex-CEO of Apple, conceded that his company’s products and
business models would be disrupted. He preferred his older products to be
cannibalized by his own new products rather than by those of the competition.
Every other business too will likely be disrupted. The key issue for business is
how to harness big data for business to generate growth opportunities and to
leapfrog competition. Organizations need to learn how to organize their
businesses so that they do not get buried in high volume, velocity, and the
variety of data, but instead use it smartly and proactively to obtain a quick but
decisive advantage over their competition. Organizations need to figure out
how to use big data as a strategic asset in real time, to identify opportunities,
thwart threats, build new capabilities, and enhance operational efficiencies.
Organizations can now effectively fuse strategy and digital business, and then
strive to design innovative “digital business strategy” around digital assets
and capabilities.
240
241
"Big data" forces organizations
to address the variety of
information assets and how fast
these new asset types are
changing information
management demands. (Gartner,
2012).
The growth of data is made

possible in part by the advancement of storage technology. The attached
graph shows the growth of disk-drive average capacities. The cost of storage
is falling, the size of storage is getting smaller, and the speed of access is
going up (Figure 13.3). Flash drives are become cheaper. Random access
memory storage used to be expensive, but now is so inexpensive that entire
databases can be loaded and processed quickly, instead of swapping sections
of it into and out of high-speed memory.
New data management and processing technologies have emerged. IT

professionals integrate “big data” structured assets with content and must
increase their business requirement identification skills. Big data is going
democratic. Business functions will be protective of their data and will begin
initiatives around exploiting it. IT support teams need to find ways to support
end-user-deployed big data solutions. Enterprise data warehouses will need to
include big data in some form. The IT platform needs to be strengthened to
help provide the enablement of a “digital business strategy” around digital
assets and capabilities.
242
243
New tools and techniques have arisen in the last 10-20 years to handle this
large and still growing data. There are technologies for storing and accessing
this data.

1. Non-relational data structures: Big data is stored using non-traditional
data structures. Large non-relational databases like Hadoop have
emerged as a leading data management platform for big data. In
Hadoop’s Distributed File System (HDFS), data is stored as ‘key and
data-value’ combinations. Google BigFile is another prominent
technology. NoSQL is emerging as a popular language to access and
manage non-relational databases. There is a matching Data Warehousing
system called Hive along with its own PigSQL language. The open-
source stack of programming languages (such as Pig) and other tools
help make Hadoop a powerful and popular tool.
2. Massively parallel computing: Given the size of data, it is useful

to divide and conquer the problem quickly using multiple processors
simultaneously. Parallel processing allows for the data to be processed
by multiple machines so that results can be achieved sooner. Map-
Reduce algorithm, originally generated at Google for doing searches
faster, has emerged as a popular parallel processing mechanism. The
original problem is divided into smaller problems, which are then
mapped to multiple processors that can operate in parallel. The outputs
of these processors are passed to an output processor that reduces the
output to a single stream, which is then sent to the end user. Figure 13.4
shows an example of a Map-Reduce algorithm.
Figure 13.4 A MapReduce Algorithm example (source:
244
www.cs.uml.edu)

3. Unstructured Information Management Architecture (UIMA).
This is one of elements in the “secret sauce” behind IBM’ Watson’s
system that reads massive amounts of data, and organizes for just-in-time
processing. Watson beat the Jeopardy (quiz program) champion in 2011
and is now used for many business applications, like diagnosis, in health
care situations. Natural language processing is another capability that
helps extend the power of big data technologies.
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Many organizations have started initiatives around the use of Big Data.
However, most organizations do not necessarily have a grip on it. Here are
some emerging insights into making better use of big data.

1. Across all industries, the business case for big data is strongly focused
on addressing customer-centric objectives. The first focus on deploying
big data initiatives is to protect and enhance customer relationships and
customer experience.
2. Solve a real pain-point. Big data should be deployed for specific

business objectives in order to avoid being overwhelmed by the sheer
size of it all.
3. Organizations are beginning their pilot implementations by using

existing and newly accessible internal sources of data. It is better to
begin with data under one’s control and where one has a superior
understanding of the data.
4. Put humans and data together to get the most insight. Combining data-
based analysis with human intuition and perspectives is better than going
just one way.
5. Advanced analytical capabilities are required, yet lacking, for

organizations to get the most value from big data. There is a growing
awareness of building or hiring those skills and capabilities.
6. Use more diverse data, not just more data. This would provide a broader
perspective into reality and better quality insights.
7. The faster you analyze the data, the more its predictive value. The value
of data depreciates with time. If the data is not processed in five minutes,
then the immediate advantage is lost.
8. Don’t throw away data if no immediate use can be seen for it. Data has
value beyond what you initially anticipate. Data can add perspective to
other data later in a multiplicative manner.
9. Maintain one copy of your data, not multiple. This would help avoid
confusion and increase efficiency.
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10. Plan for exponential growth. Data is expected to continue to grow at

exponential rates. Storage costs continue to fall, data generation

continues to grow, data-based applications continue to grow in capability
and functionality.
11. A scalable and extensible information management foundation is a

prerequisite for big data advancement. Big data builds upon resilient,
secure, efficient, flexible, and real-time information processing
environment.
12. Big data is transforming business, just like IT did. Big data is a new

phase representing a digital world. Business and society are not immune
to its strong impacts.
247
Conclusion
Big Data is a new natural force and natural resource. The exponentially
growing volume, variety and velocity of data is constantly disrupting
businesses across all industries, at multiple levels from product to business
models. Organizations need to begin initiatives around big data; acquire
skills, tools and technologies; and show the vision to disrupt their industry
and come out ahead.
248
Review Questions
1: What are the 3 Vs of Big Data?
2: How does Big Data impact the business models?
3: What is Hadoop?
4: How does Map-Reduce algorithm work?
5: What are the key issues in managing Big Data?
249
Data needs to be efficiently structured and stored so that it includes all the
information needed for decision making, without duplication and loss of
integrity. Here are top ten qualities of good data.
Data should be:
1. Accurate: Data should retain consistent values

across data stores, users and applications. This is the most important
aspect of data. Any use of inaccurate or corrupted data to do any
analysis is known as the garbage-in-garbage-out (GIGO) condition.
2. Persistent: Data should be available for all

times, now and later. It should thus be nonvolatile, stored and
managed for later access.
3. Available: Data should be made available to

authorized users, when, where, and how they want to access it,
within policy constraints.
4. Accessible: Not only should data be available to

user, it should also be easy to use. Thus, data should be made
available in desired formats, with easy tools. MS Excel is a popular
medium to access numeric data, and then transfer to other formats.
5. Comprehensive: Data should be gathered from

all relevant sources to provide a complete and holistic view of the
situation. New dimensions should be added to data as and when
they become available.
6. Analyzable: Data should be available for

analysis, for historical and predictive purposes. Thus, data should
be organized such that it can be used by analytical tools, such as
OLAP, data cube, or data mining.
7. Flexible: Data is growing in variety of types.

Thus, data stores should be able to store a variety of data types:
250
small/large, text/video, and so on
8. Scalable: Data is growing in volume. Data

storage should be organized to meet emergent demands.
9. Secure: Data should be doubly and triply backed

up, and protected against loss and damage. There is no bigger IT
nightmare than corrupted data. Inconsistent data has to be manually
sorted out which leads to loss of face, loss of business, downtime,
and sometimes the business never recovers.
10. Cost-effective: The cost of collecting data and

storing it is coming down rapidly. However, still the total cost of
gathering, organizing, and storing a type of data should be
proportional to the estimated value from its use.
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Data management has evolved from manual filing systems to the most
advanced online systems capable of handling millions of data processing and
access requests every second.
The first data management systems were called file systems. These mimicked
paper files and folders. Everything was stored chronologically. Access to this
data was sequential.
The next step in data modeling was to find ways to access any random record
quickly. Thus hierarchical database systems appeared. They were able to
connect all items for an order, given an order number.
The next step was to traverse the linkages both ways, from top of the
hierarchy to the bottom, and from the bottom to the top. Given an item sold,
one should be able to find its order number, and list all the other items sold in
that order. Thus there were networks of links established in the data to track
those relationships.
The major leap came when the relationship between data elements itself
became the center of attention. The relationship between data values was the
key element of storage. Relationships were established through matching
values of common attributes, rather than by location of the record in a file.
This led to data modeling using relational algebra. Relations could be joined
and subtracted, with set operations like union and intersection. Searching the
data became an easier task by declaring the values of a variable of interest.
The relational model was enhanced to include variables with non-comparable

values like binary objects (such as pictures) which had to be processed
differently. Thus emerged the idea of encapsulating the procedures along with
the data elements they worked on. The data and its methods were
encapsulated into an object. Those objects could be further specialized. For
example, a vehicle is an object with certain attributes. A car and a truck are
more specialized versions of a vehicle. They inherited the data structure of the
vehicle, but had their own additional attributes. Similarly the specialized
object inherited all the procedures and programs associated with the more
general entity. This became the object-oriented model.
252
The first mathematical-theory-driven model for data management was
designed by Ed Codd of IBM in 1970.
1. A relational database is composed of a set of

relations (data tables), which can be joined using shared attributes.
A “data table” is a collection of instances (or records), with a key
attribute to uniquely identify each instance.
2. Data tables can be JOINed using the shared

“key” attributes to create larger temporary tables, which can be
queried to fetch information across tables. Joins can be simple ones
as between two tables. Joins can also be complex with AND, OR,
UNION or INTERSECTION, and more operations.
3. High-level commands in Structured Query

Language (SQL) can be used to perform joins, selection, and
organizing of records.
Relational data models flow from conceptual models, to logical models to

physical implementations. Data can be conceived of as being about entities,
and relationships among entities. A relationship between entities may be
hierarchy between entities, or transactions involving multiple entities. These
can be graphically represented as an entity–relationship diagram (ERD).
In Figure 14.1, the rectangle reflects the entities students and courses. The
relationship is enrolment. In the example below the rectangle reflects the
entities Students and Courses. The diamond shows the Enrolment
relationship.
Figure: 14.1 Simple relationship between two entities
Here are some fundamental concepts on ERD:

1. An entity is any object or event about which someone chooses to collect
data, which may be a person, place, or thing (e.g., sales person, city,
product, vehicle, employee).
2. Entities have attributes. Attributes are data items that have something in
253
common with the entity. For example, student id, student name, and
student address represent details for a student entity. Attributes can be
single-valued (e.g., student name) or multi-valued (list of past addresses
for the student). Attribute can be simple (e.g., student name) or
composite (e.g., student address, composed of street, city, and state).
3. Every entity must have a key attribute(s) that can be used to identify an
instance. E.g. Student ID can identify a student. A primary key is a
unique attribute value for the instance (e.g. Student ID). Any attribute
that can serve as a primary key (e.g. Student Address) is a candidate key.
A secondary key—a key which may not be unique, may be used to select
a group of records (Student city). Some entities will have a composite
key—a combination of two or more attributes that together uniquely
represent the key (e.g. Flight number and Flight date). A foreign key is
useful in representing a one-to-many relationship. The primary key of
the file at the one end of the relationship should be contained as a foreign
key on the file at the many end of the relationship.
4. Relationships have many characteristics: degree, cardinality, and
participation.
5. Degree of relationship depends upon the number of entities
participating in a relationship. Relationships can be unary (e.g.,
employee and manager-as-employee), binary (e.g., student and course),
and ternary (e.g., vendor, part, warehouse)
6. Cardinality represents the extent of participation of each entity in a
relationship.
1. One-to-one (e.g., employee and parking space)
2. One-to-many (e.g., customer and orders)
3. Many-to-many (e.g., student and course)
7. Participation indicates the optional or mandatory nature of relationship.
1. Customer and order (mandatory)
2. Employee and course (optional)
8. There are also weak entities that are dependent on another entity for its
existence (e.g., employees and dependents). If an employee data is
removed, then the dependent data must also be removed.
9. There are associative entities used to represent many-to-many
relationship relationships (e.g., student-course enrolment). There are
two ways to implement a many-many relationship. It could be converted
into two one-to-many relationships with an associative entity in the
middle. Alternatively, the combination of primary keys of the entities
participating in the relationship will form the primary key for the
associative entity.
10. There are also super sub type entities. These help represent

additional attributes, on a subset of the records. For example, vehicle is a
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supertype and passenger car is its subtype.
255
Once the logical data model has been created, it is easy to translate it into a
physical data model, which can then be implemented it using any publicly
available DBMS. Every entity should be implemented by creating a database
table. Every table will be a specific data field (key) that would uniquely
identify each relation (or row) in that table. Each master table or database
relation should have programs to create, read, update, and delete the records.
The databases should follow 3 Integrity Constraints.

1. Entity integrity ensures that the entity or a table is healthy. The primary
key cannot have a null value. Every row must have a unique value. Or
else that row should be deleted. As a corollary, if the primary key is a
composite key, none of the fields participating in the key can contain a
null value. Every key must be unique.
2. Domain integrity is enforced by using rules to validate the data as being

of the appropriates range and type.
3. Referential integrity governs the nature of records in a one-to-many

relationship. This ensures that the value of a foreign key should have a
matching value in primary keys of the table referred to by the foreign
key.
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These are many database management software systems that help manage the
activities related to storing the data model, the data itself, and doing the
operations on the data and relations. The data in the DBMS grows, and it
serves many users of the data concurrently. The DBMS typically runs on a
computer called a database server – in an n-tier application architecture. Thus
in an airline reservation system, millions of transactions might simultaneously
try to access the same set of data. The database is constantly monitored and
managed to provide data access to all authorized users, securely and speedily,
while keeping the database consistent and useful. Content management
systems are special purpose DBMS, or just features within standard DBMS,
that help people manage their own data on a web-site. There are object-
oriented and other more complex ways of managing data.
257
SQL is a very easy and powerful language to access relational databases.
There are two essential components of SQL: the Data Definition Language
(DDL) and Data Manipulation Language.
DDL provides instructions to create new database, and to create new tables
within a database. Further it provides instructions to delete a database, or just
a few tables within a database. There are other ancilliary commands to define
indexes etc for efficient access to the database.
DML is the heart of SQL. It provides instructions to add, read, modify and
delete data from the database and any of its tables. The data can selectively
accessed, and then formatted, to answer a specific question. For example, to
find the sales of movies by quarter, the SQL query would be:
SELECT Product-Name,
SUM(Amount)
FROM Movies-Transactions
GROUP BY Product-Name
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Conclusion
Data should be modeled to achieve the business objectives. Good data should
be accurate and accessible, so that it can be used for business operations.
Relational data model is the two most popular way of managing data today.
259
Review Questions
1: Who invented relational model and when?
2: How does relational model mark a clear break from previous database
models?
3: What is an Entity-Relationship diagram?
4: What kinds of attributes can an entity have?
5: What are the different kinds of relationships?
260

Data Mining Tutorial with Weka

Developed for academic use only
by Dr. Anil Maheshwari & Dr. Edi Shivaji
261
This tutorial for the WEKA software platform is designed for use by a student
of a course in Data Mining applications. This tutorial will provide examples
of solving certain data mining problems using Weka tool and the sample
datasets provided with it.
Step 1: Download the free Weka software
http://www.cs.waikato.ac.nz/ml/weka/downloading.html
Step 2: Download the free Weka datasets
http://www.cs.waikato.ac.nz/ml/weka/datasets.html
Step 3: Access the associated textbook to learn about data mining
http://www.cs.waikato.ac.nz/~ml/weka/book.html
This tutorial used data from the free Weka datasets. The sample problems
addressed in this tutorial are:

1. Classification models: These are the most important application of data

mining. We will use Decision trees and Regression methods
2. Clustering: Using the K-means algorithm
3. Association Rule Mining: Using Apriori algorithm.
Exercise 1: Classification using DECISION TREES
262
Problem statement: What is the best way to predict that a game will be on or off based on weather indicators? A data set of past
decision has been provided.
Dataset used: Weather – nominal. It describes 14 instances of weather conditions and whether an outdoor game was possible or
not (Play) under those weather conditions. Here is the raw data.
Load the data set. It is nominal. However, there is no need for nominality of data for Classification.
Analysis used: J48 decision tree algorithm (It is an implementation of C4.5 algorithm). It is a top-down approach.
Results:
Instances: 14
Attributes: 5
outlook
temperature
humidity
windy
play
263
Test mode:evaluate on training data
=== Classifier model (full training set) ===
J48 pruned tree

------------------
outlook = sunny
| humidity = high: no (3.0)
| humidity = normal: yes (2.0)
outlook = overcast: yes (4.0)
outlook = rainy
| windy = TRUE: no (2.0)
| windy = FALSE: yes (3.0)

Number of Leaves : 5
Size of the tree : 8
=== Summary ===
Correctly Classified Instances 14 100 %

Incorrectly Classified Instances 0 0 %
Kappa statistic 1
Mean absolute error 0
Root mean squared error 0
Relative absolute error 0 %
Root relative squared error 0 %
Total Number of Instances 14

=== Detailed Accuracy By Class ===
TP Rate FP Rate Precision Recall F-Measure ROC Area Class
1 0 1 1 1 1 yes
1 0 1 1 1 1 no
Wtd Avg. 1 0 1 1 1 1

=== Confusion Matrix ===
a b <-- classified as
9 0 | a = yes
0 5 | b = no

The model explains 100% of the instances correctly. The pruned tree
Note:
shows the rules for making the decision in a text form.
: The first split variable is “Outlook”. If outlook is overcast, then

Interpreting the tree
check for humidity. If outlook is sunny, the answer is yes. If the outlook is
rainy, then check for windy.
Visualizing the output: Weka can create a visual version of the tree.

264
Interpreting the Visual Tree: The visual decision tree is simple and self-explanatory.
Exercise:

1. Try different decision tree algorithms in Weka for this simple data set.
2. Compare time taken, accuracy, and interpretability of the output.
Exercise 2: Classification using DECISION TREES

Problem statement: What is the best model to diagnose whether a breast lump is benign or malignant?
Dataset used: breast-w. This is much larger data set. It shows many more variables and instances. It describes 699 instances of
biopsy analyses of breast cancer suspects. There are 15 variables: some of which are nominal while others are numeric. The class
variable shows if the instance was judged to be benign of malignant?
Load the data set. There is no need for nominality of data for Decision trees. For simplicity of analysis however, only the
nominal variables were kept, while others were removed from the data set before analysis.
Analysis used: J48 decision tree algorithm.
Results:
Scheme:weka.classifiers.trees.J48 -C 0.25 -M 2
Relation: wisconsin-breast-cancer
Instances: 699
Attributes: 10
Clump_Thickness
Cell_Size_Uniformity
Cell_Shape_Uniformity
Marginal_Adhesion
Single_Epi_Cell_Size
Bare_Nuclei
Bland_Chromatin
Normal_Nucleoli
Mitoses
265
Class – (Benign/Malignant)

Test mode:evaluate on training data
=== Classifier model (full training set) ===

J48 pruned tree
------------------
Cell_Size_Uniformity <= 2
| Bare_Nuclei <= 3: benign (405.39/2.0)
| Bare_Nuclei > 3
| | Clump_Thickness <= 3: benign (11.55)
| | Clump_Thickness > 3
| | | Bland_Chromatin <= 2
| | | | Marginal_Adhesion <= 3: malignant (2.0)
| | | | Marginal_Adhesion > 3: benign (2.0)
| | | Bland_Chromatin > 2: malignant (8.06/0.06)
Cell_Size_Uniformity > 2
| Cell_Shape_Uniformity <= 2
| | Clump_Thickness <= 5: benign (19.0/1.0)
| | Clump_Thickness > 5: malignant (4.0)
| Cell_Shape_Uniformity > 2
| | Cell_Size_Uniformity <= 4
| | | Bare_Nuclei <= 2
| | | | Marginal_Adhesion <= 3: benign (11.41/1.21)
| | | | Marginal_Adhesion > 3: malignant (3.0)
| | | Bare_Nuclei > 2
| | | | Clump_Thickness <= 6
| | | | | Cell_Size_Uniformity <= 3: malignant (13.0/2.0)
| | | | | Cell_Size_Uniformity > 3
| | | | | | Marginal_Adhesion <= 5: benign (5.79/1.0)
| | | | | | Marginal_Adhesion > 5: malignant (5.0)
| | | | Clump_Thickness > 6: malignant (31.79/1.0)
| | Cell_Size_Uniformity > 4: malignant (177.0/5.0)

Number of Leaves : 14
Size of the tree : 27
Time taken to build model: 0.07 seconds
=== Evaluation on training set ===
=== Summary ===
Correctly Classified Instances 686 98.1402 % (i.e 98% cases are classified correctly)
Incorrectly Classified Instances 13 1.8598 %
Kappa statistic 0.959
Mean absolute error 0.0355
Root mean squared error 0.1324
Relative absolute error 7.8614 %
Root relative squared error 27.8462 %
Total Number of Instances 699

=== Detailed Accuracy By Class ===
TP Rate FP Rate Precision Recall F-Measure ROC Area Class
0.983 0.021 0.989 0.983 0.986 0.989 benign
0.979 0.017 0.967 0.979 0.973 0.989 malignant
Weighted Avg. 0.981 0.02 0.981 0.981 0.981 0.989

=== Confusion Matrix ===

a b <-- classified as
450 8 | a = benign (450 benign cases are correctly classified as benign, 8 are false positives)
5 236 | b = malignant (236 malignant cases are correctly classified as malignant, 5 are false negatives)
Visualizing the output: The pruned tree looks very complex and unreadable, and is therefore removed from this document. The
visual decision tree makes it more easy to grasp.
266

Interpreting the decision tree output:
1. The numbers on the leaf nodes show the correctly and incorrectly classified instances for that node. The decision rule/
node on the right incorrectly classifies 5 instances, even while it accurately classifies 177 of the instances correctly.
2. Not all nodes are equally important. Some nodes explain many more instances than other nodes.
1. E.g. a single node on the left of the tree represents a very simple rule (cell_size_uniformity <2 and bare_nuclei
<3) explains easily 90% (405 out of 450) of the benign cases, and more than 55% of the total cases (405 out of
699).
2. Similarly, the node on the right explains over 73% of the malignant cases (177 out of 241), and thus provides a
clear rule or heuristic.
3. The tree shows a clear path for diagonozing each case. And so on and on.

Exercise 3: Cluster Analysis using K-Means algorithm

Nature of problem/opportunity: Understand the underlying clusters instances of breast cancer evaluations.
Dataset used: breast-w. It describes 699 instances of biopsy analyses of breast cancer suspects. There are 15 variables: some of
which are nominal while others are numeric. The class variable shows if the instance was judged to be benign of malignant.
Data preparation: Load the data set.
Analysis used: K-means algorithm. Choices include number of clusters to begin with.
Output of the analysis.
Instances: 699
Attributes: 10

=== Model and evaluation on training set ===
267

kMeans
======

Number of iterations: 5
Within cluster sum of squared errors: 259.92291180466714
Missing values globally replaced with mean/mode

Cluster Centroids:
Cluster#
Attribute Full Data 0 1
(699) (246) (453)
=====================================================
Clump_Thickness 4.4177 7.1748 2.9205

Cell_Size_Uniformity 3.1345 6.5976 1.2539
Cell_Shape_Uniformity 3.2074 6.5732 1.3797
Marginal_Adhesion 2.8069 5.5325 1.3267
Single_Epi_Cell_Size 3.216 5.3089 2.0795
Bare_Nuclei 3.5447 7.5576 1.3654
Bland_Chromatin 3.4378 5.9634 2.0662
Normal_Nucleoli 2.867 5.8943 1.223
Mitoses 1.5894 2.561 1.0618
Class benign malignant benign
Clustered Instances
0 246 ( 35%)
1 453 ( 65%)

Interpretation: This is a very clear result. There are clearly two classes … malignant and benign.
Sensitivity analysis of Clustering: The two classes above could be unduly influenced by the bipolar variable class variable
(benign, malignant). So, remove that variable and run the same analysis again.
kMeans
======

Number of iterations: 6

Cluster centroids:
Cluster#
Attribute Full Data 0 1
(699) (233) (466)
========================================================
Clump_Thickness 4.4177 7.1588 3.0472
Cell_Size_Uniformity 3.1345 6.7983 1.3026
Cell_Shape_Uniformity 3.2074 6.7296 1.4464
Marginal_Adhesion 2.8069 5.7339 1.3433
Single_Epi_Cell_Size 3.216 5.4721 2.088
Bare_Nuclei 3.5447 7.874 1.38
Bland_Chromatin 3.4378 6.103 2.1052
Normal_Nucleoli 2.867 6.0773 1.2618
Mitoses 1.5894 2.5494 1.1094

Clustered Instances
0 233 ( 33%)
1 466 ( 67%)
Interpretation:

1. The cluster structure has not changed.
2. However, the strength of instances in each cluster is slightly changed … from 35-65% to 33-67%. So, there is more error
268
of Type-2; i.e. more cases are marked in the ‘benign’ category, than is actually the case.
Sensitivity analysis of Clustering#2: May be there are cases that are not fully malignant, are but are not truly benign. So, change
the number of clusters to 3, instead of 2. Run the analysis again.
Results:

Cluster centroids:
Cluster#
Attribute Full Data 0 1 2
(699) (222) (178) (299)
=================================================
Clump_Thickness 4.4177 7.1982 5.0337 1.9866
Cell_Size_Uniformity 3.1345 6.964 1.7584 1.1104
Cell_Shape_Uniformity 3.2074 6.8829 2.0169 1.1873
Marginal_Adhesion 2.8069 5.9144 1.7191 1.1472
Single_Epi_Cell_Size 3.216 5.5045 2.4494 1.9732
Bare_Nuclei 3.5447 7.9578 1.8381 1.284
Bland_Chromatin 3.4378 6.2027 2.5225 1.9298
Normal_Nucleoli 2.867 6.1937 1.7303 1.0736
Mitoses 1.5894 2.6126 1.191 1.0669

Interpretation of results:

1. The cluster structure has obviously changed since the number of clusters has changed. It is clear that the real split has
been in the benign group
2. A significant number of benign instances seems to have fallen into an intermediate/borderline category. Some marginally
malignant cases have also fallen into this same category. These cases may need to be put under extra scrutiny.

Exercise 4: Association Rules using Apriori algorithm

ASSOCIATION RULES
Nature of problem/opportunity: Understand the underlying associations among commercial aspects of life of foreign workers in
Germany.
Data Set used: Credit-g.arff . This shows data about demographics, job type, assets, and credit class of workers in Germany. It
shows 17 variables for 1000 german workers.
Data preparation: Load the data set. Ensure all non-nominal variables are removed from analysis. Because association rules
work only on nominal data.
Analysis used: Apriori algoritm. Choices include changing the minimum level of confidence in a rule (say 90%), and minimal
support level (10%).
Output of the analysis.
Instances: 1000
Attributes: 11
269
checking_status
credit_history
purpose
savings_status
employment
personal_status
property_magnitude
housing
job
own_telephone
class
=== Associator model (full training set) ===
Apriori
=======
Minimum support: 0.1 (100 instances)
Minimum metric <confidence>: 0.9
Number of cycles performed: 18
……
Ten Best rules found:
1. housing=for free 108 ==> property_magnitude=no known property 104 conf:(0.96)
2. checking_status=no checking credit_history=critical/other existing credit housing=own 126 ==> class=good 120 conf:(0.95)
3. checking_status=no checking purpose=radio/tv 127 ==> class=good 120 conf:(0.94)
4. checking_status=no checking purpose=radio/tv housing=own 108 ==> class=good 102 conf:(0.94)
5. personal_status=male single property_magnitude=car job=skilled 124 ==> housing=own 117 conf:(0.94)
6. checking_status=no checking personal_status=male single housing=own job=skilled 121 ==> class=good 114 conf:(0.94)
7. checking_status=no checking credit_history=critical/other existing credit 153 ==> class=good 143 conf:(0.93)
8. checking_status=no checking employment=>=7 115 ==> class=good 107 conf:(0.93)
9. personal_status=male single property_magnitude=car class=good 129 ==> housing=own 120 conf:(0.93)
10. checking_status=no checking job=skilled own_telephone=yes 117 ==> class=good 108 conf:(0.92)
Interpreting the Output

1. Rule 1 implies that 96% of those who live in free housing, do not own any property.
2. Rule 5 implies that single males that hold skilled jobs and own a car, are also likely to own a house (94% chance).
3. Rule 9 implies single males that have good credit history and own a car, are also likely to own a house (93% chance).
4. Rules 5 and 9 are highly overlapping. These are two candidates for potentially combining.
5. And so on and on.

---***---
270
271

Data Mining Tutorial with R

Developed for academic use only
by Dr. Anil Maheshwari & Mr. Tonmay Bhattacharjee
272

Basic R tutorial for data mining

Learn the basic:

1. Google “code R” and go to the R code school website. You can directly go to http://tryr.codeschool.com too.
2. Sign up/register providing the simple information.
3. Follow the simple instruction and practice on the given code window.
4. Finish the step and unlock the next steps.
5. Finish all seven steps and you’ll see a congratulation page like bellow.
Install R:

1. Click on the official R programming site or directly visit http://www.r-project.org/
You should see something like the following
273

2. Click download R to get the proper mirror. This should take you to a page something like bellow.

3. Choose the link for Iowa State University or any other mirror you like.
274

4. Choose your operating system. For my case it was windows.

5. Click install R for the first time.

6. Click on download to download the exe file. ( for windows )

7. Click on Save file to save the exe to your computer.
275

8. Double click the .exe file for installation.

9. Click Run to start the installation. Follow the steps. Click next, accept agreement, select your installation folder and finish
the installation.
276

Coding with R:
Select the R application from your start menu. All coding style should be same what you practiced on R code school.
Decision tree:

1. Load library MASS to support functions and datasets for Venables and Ripley's using library(“MASS”)
2. Convert your .xls or .xlsx file to .csv file and put on Documents folder.
3. Load the data to a variable using read.csv(“filename.csv”). In my case I’ve loaded the data to the variable named data
using data<-read.csv(“height.csv”)
4. Load the library rpart for the decision tree using library(“rpart”)
5. Draw the tree and assign to a variable like tree<-rpart(gend~Height+age+wt, data=data, method=class). Here gend,
Height, age and wt are column names and I’m drawing decision tree to find out gend based on Height, age and wt. data is
the variable name of your csv file loaded to it. And method=class stands for classification.
6. You can plot the tree using plot(tree)
7. To put the labels on tree you can use text(tree). A simple decision tree should be drawn.
8. To make the tree little bit fancy you can install rpart.plot using install.packages(‘rpart.plot’)
9. Select your mirror for the installation.
10. In the same way install RColorBrewer using install.packages(‘RColorBrewer’). It has library rattle which is a free
graphical interface for data mining to code with R.
11. Load the rattle library using library(‘rattle’)
12. Load the library rpart.plot using library(‘rpart.plot’)
13. Load the library RColorBrewer using library(‘RColorBrewer’)
14. Now draw the tree using fancyRpartPlot(tree)
The following example code and tree is given bellow
277

Correlation and regression:

1. In the same way described in decision tree you can install the necessary library and load the data.
2. Using cov(data) you can see relation
278
3. Using pairs(data) you can see the regression.

The following example illustrates the steps:
279

Here is another example:
280
281

For any help visit:
http://www.rdatamining.com/docs/introduction-to-data-mining-with-r
282
Teradatanetwork.com: Join Teradata University Network to access tools and

materials for Business Intelligence. It is completely free for students.
Here are some other books and papers for a deeper dive into the topics
covered in this book.

1. Ayres, I. (2007) SuperCrunchers: Why Thinking-by-Numbers Is the

New Way to be Smart. Random House Publishing.
2. Davenport, T. & J. Harris (2007). Competing on Analytics: The New
Science of Winning. HBS Press.
3. Gartner (2012). Business Implications of Big Data.
4. Gartner (2012). Technology Implications of Big Data.
5. Gordon Linoff & Michael Berry (2011). Data Mining Techniques. 3 rd
edition. Wiley.
6. Groebner, David F,P.W. Shannon, P.C. Fry. (2013). Business Statistics
(9 edition). Pearson.
th
7. Jain, Anil K. (2008). “Data Clustering: 50 years beyond K-Means.” 19 th
International Conference on Pattern Recognition.

8. Lewis, Michael (2004). Moneyball: The Art of Winning an Unfair
Game. Norton & Co.
9. Andrew D Martin et al. “Competing Approaches to Predicting Supreme
Court Decision making”, Perspective in Politics, 2004).
10. Mayer-Schonberger, Viktor; Cukier, Kenneth (2013). Big Data: A

Revolution That Will Transform How We Live, Work, and Think .

Houghton Mifflin Harcourt.
11. McKinsey Global Institute Report (2011). Big data: The next

frontier for innovation, competition, and productivity. Mckinsey.com

12. Sathi, Arvind (2011). Customer Experience Analytics: The Key

to Real-Time, Adaptive Customer Relationships. Independent

Publishers Group.
13. Sharda, R., D. Dusen, and E. Turban. (2014). Business

Intelligence and Data Analytics. 10 edition. Pearson.

th
14. Shmueli, G, N. Patel, & P. Bruce (2010). Data Mining for

Business Intelligence. Wiley.

15. Siegel, Eric, (2013). Predictive Analytics. Wiley.

283
16. Silver, N. (2012). The Signal and the Noise: Why So Many

Predictions Fail but Some Don’t. Penguin Press.

17. Statsoft. www.statsoft/textbook

18. Taylor, James (2011). Decision Management Systems: A

Practical Guide to Using Business Rules and Predictive Analytics

(IBM Press). Pearson Education.
19. Weka system.

http://www.cs.waikato.ac.nz/ml/weka/downloading.html
20. Witten, I., E. Frank, M. Hall (2009). Data Mining. 3 edition.

rd
Morgan Kauffman.
284
Advance Praise for this book:
“This book is a splendid and valuable addition to this subject. The whole
book is well written and I have no hesitation to recommend that this can be
adapted as a textbook for graduate courses in Business Intelligence and Data
Mining.” Dr. Edi Shivaji, Des Moines, Iowa, USA.
“Really well written and timely as the World gets in the Big Data mode! I
think this can be a good bridge and primer for the uninitiated manager who
knows Big Data is the future but doesn't know where to begin!” – Dr. Alok
Mishra, Singapore.
“This book has done a great job of taking a complex, highly important subject
area and making it accessible to everyone. It begins by simply connecting to
what you know, and then bang - you've suddenly found out about Decision
Trees, Regression Models and Artificial Neural Networks, not to mention
cluster analysis, web mining and Big Data.” – Ms. Charmaine Oak, United
Kingdom.
“As a complete novice to this area just starting out on a MBA course I found
the book incredibly useful and very easy to follow and understand. The
concepts are clearly explained and make it an easy task to gain an
understanding of the subject matter.” – Mr. Craig Domoney, South Africa.
About the Author
Dr. Anil Maheshwari is a Professor of Management Information Systems at

Maharishi University of Management, and the Director of their Center for
Data Analytics. He teaches courses in data analytics, and helps researchers
with extracting deep insights from their data. He worked in a variety of
leadership roles at IBM in Austin TX, and has also worked at many other
companies including startups. He has taught at the University of Cincinnati,
City University of New York, University of Illinois, and others. He earned an
Electrical Engineering degree from Indian Institute of Technology in Delhi,
an MBA from Indian Institute of Management in Ahmedabad, and a Ph.D.
from Case Western Reserve University. He is a practitioner of Transcendental
Meditation technique. He blogs interesting stuff at anilmah.wordpress.com
285
286
Table of Contents
Preface
Pattern Recognition
Data
Database
Data Warehouse
Data Mining
Data Visualization
Review Questions
Section 1
Decision types
BI Tools
BI Skills
BI Applications
Education
Retail
Banking
Financial Services
Insurance
Manufacturing
Telecom
Public Sector
Conclusion
Review Questions
DW Architecture
287
Data Sources
DW Access
DW Best Practices
Conclusion
Review Questions
Conclusion
Review Questions
Types of Charts
Conclusion
Review Questions
Section 2
Conclusion
Review Questions
288
Regression Exercise
Logistic Regression
Conclusion
Review Exercises:
Developing an ANN
Conclusion
Review Exercises
Clustering Exercise
Conclusion
Review Exercises
Apriori Algorithm
289
Conclusion
Review Exercises
Section 3
Text Mining Process
Mining the TDM
Conclusion
Review Questions
Web content mining
Web usage mining
Conclusion
Review Questions
Caselet: Personalized Promotions at Sears
Defining Big Data
Big Data Landscape
Conclusion
Review Questions
Conclusion
Review Questions
290
291
Indice
Preface 4
Chapter 1: Wholeness of Data Analytics 11
Business Intelligence 12
Caselet: MoneyBall - Data Mining in Sports 13
Pattern Recognition 15
Data Processing Chain 18
Data 18
Database 20
Data Warehouse 22
Data Mining 24
Data Visualization 27
Organization of the book 29
Review Questions 30
Section 1 31
Chapter 2: Business Intelligence Concepts and Applications 32
Caselet: Khan Academy – BI in Education 34
BI for better decisions 36
Decision types 37
BI Tools 38
BI Skills 40
BI Applications 41
Customer Relationship Management 41
Healthcare and Wellness 42
Education 43
Retail 43
Banking 44
Financial Services 45
Insurance 46
Manufacturing 47
Telecom 47
Public Sector 48
Conclusion 50
Review Questions 51
292
Liberty Stores Case Exercise: Step 1 52
Chapter 3: Data Warehousing 53
Caselet: University Health System – BI in Healthcare 54
Design Considerations for DW 56
DW Development Approaches 58
DW Architecture 59
Data Sources 60
Data Loading Processes 61
Data Warehouse Design 62
DW Access 63
DW Best Practices 64
Conclusion 65
Review Questions 66
Chapter 4: Data Mining 68
Caselet: Target Corp – Data Mining in Retail 70
Gathering and selecting data 72
Data cleansing and preparation 74
Outputs of Data Mining 76
Evaluating Data Mining Results 78
Data Mining Techniques 80
Tools and Platforms for Data Mining 83
Data Mining Best Practices 85
Myths about data mining 87
Data Mining Mistakes 88
Conclusion 90
Review Questions 91
Chapter 5: Data Visualization 93
Caselet: Dr Hans Gosling - Visualizing Global Public Health 94
Excellence in Visualization 96
Types of Charts 98
Visualization Example 101
Visualization Example phase -2 106
Tips for Data Visualization 107
293
Conclusion 108
Review Questions 109
Section 2 111
Chapter 6: Decision Trees 112
Caselet: Predicting Heart Attacks using Decision Trees 113
Decision Tree problem 115
Decision Tree Construction 118
Lessons from constructing trees 124
Decision Tree Algorithms 126
Conclusion 129
Chapter 7: Regression 134
Caselet: Data driven Prediction Markets 135
Correlations and Relationships 136
Visual look at relationships 137
Regression Exercise 139
Non-linear regression exercise 145
Logistic Regression 148
Advantages and Disadvantages of Regression Models 149
Conclusion 151
Review Exercises: 152
Chapter 8: Artificial Neural Networks 156
Caselet: IBM Watson - Analytics in Medicine 157
Business Applications of ANN 159
Design Principles of an Artificial Neural Network 160
Representation of a Neural Network 162
Architecting a Neural Network 163
Developing an ANN 164
Advantages and Disadvantages of using ANNs 166
Conclusion 167
Review Exercises 168
Chapter 9: Cluster Analysis 169
294
Caselet: Cluster Analysis 170
Applications of Cluster Analysis 171
Definition of a Cluster 172
Representing clusters 173
Clustering techniques 174
Clustering Exercise 176
K-Means Algorithm for clustering 179
Selecting the number of clusters 183
Advantages and Disadvantages of K-Means algorithm 184
Conclusion 185
Chapter 10: Association Rule Mining 190
Caselet: Netflix: Data Mining in Entertainment 191
Business Applications of Association Rules 193
Representing Association Rules 194
Algorithms for Association Rule 195
Apriori Algorithm 196
Association rules exercise 197
Creating Association Rules 201
Conclusion 203
Section 3 206
Chapter 11: Text Mining 207
Caselet: WhatsApp and Private Security 208
Text Mining Applications 210
Text Mining Process 212
Term Document Matrix 214
Mining the TDM 217
Comparing Text Mining and Data Mining 218
Text Mining Best Practices 220
Conclusion 221
Chapter 12: Web Mining 224
295
Web content mining 226
Web structure mining 227
Web usage mining 228
Web Mining Algorithms 230
Conclusion 231
Chapter 13: Big Data 233
Caselet: Personalized Promotions at Sears 234
Defining Big Data 236
Big Data Landscape 239
Business Implications of Big Data 240
Technology Implications of Big Data 242
Big Data Technologies 244
Management of Big Data 246
Conclusion 248
Chapter 14: Data Modeling Primer 250
Evolution of data management systems 252
Relational Data Model 253
Implementing the Relational Data Model 256
Database management systems (DBMS) 257
Structured Query Language 258
Conclusion 259
Appendix 1: Data Mining Tutorial with Weka 261
Appendix 1: Data Mining Tutorial with R 272
Additional Resources 283
296

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Data Analytics Made Accessible

Copyright © 2015 by Anil K. Maheshwari, Ph.D.

No part of this book may be copied or transmitted without written permission.

Dr. Anil K. Maheshwari

Chapter 1: Wholeness of Data Analytics

Caselet: MoneyBall - Data Mining in Sports

Data Processing Chain

Organization of the book

Chapter 2: Business Intelligence Concepts and Applications

Caselet: Khan Academy – BI in Education

BI for better decisions

Customer Relationship Management

Healthcare and Wellness

Liberty Stores Case Exercise: Step 1

Chapter 3: Data Warehousing

Caselet: University Health System – BI in Healthcare

Design Considerations for DW

Data Loading Processes

Data Warehouse Design

Liberty Stores Case Exercise: Step 2

Chapter 4: Data Mining

Caselet: Target Corp – Data Mining in Retail

Gathering and selecting data

Data cleansing and preparation

Outputs of Data Mining

Evaluating Data Mining Results

Data Mining Techniques

Tools and Platforms for Data Mining

Data Mining Best Practices

Myths about data mining

Data Mining Mistakes

Liberty Stores Case Exercise: Step 3

Chapter 5: Data Visualization

Caselet: Dr Hans Gosling - Visualizing Global Public Health

Visualization Example phase -2

Tips for Data Visualization

Liberty Stores Case Exercise: Step 4

Chapter 6: Decision Trees

Caselet: Predicting Heart Attacks using Decision Trees

Decision Tree problem

Decision Tree Construction

Lessons from constructing trees

Decision Tree Algorithms

Liberty Stores Case Exercise: Step 5

Caselet: Data driven Prediction Markets

Correlations and Relationships

Visual look at relationships

Non-linear regression exercise

Advantages and Disadvantages of Regression Models

Liberty Stores Case Exercise: Step 6

Chapter 8: Artificial Neural Networks

Caselet: IBM Watson - Analytics in Medicine

Business Applications of ANN

Design Principles of an Artificial Neural Network

Representation of a Neural Network

Architecting a Neural Network

Advantages and Disadvantages of using ANNs

Chapter 9: Cluster Analysis

Caselet: Cluster Analysis

Applications of Cluster Analysis

K-Means Algorithm for clustering

Selecting the number of clusters

Advantages and Disadvantages of K-Means algorithm