Analytics, Data Science and AI:

Systems for Decision Support

Eleventh Edition

Chapter 4
Data Mining Process, Methods, and
Algorithms

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Learning Objectives

4.1 Define data mining as an enabling technology for business analytics

4.2 Understand the objectives and benefits of data mining
4.3 Become familiar with the wide range of applications of data mining
4.4 Learn the standardized data mining processes
4.5 Learn different methods and algorithms of data mining.
4.6 Build awareness of the existing data mining software tools
4.7 Understand the privacy issues, pitfalls, and myths of data mining

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What is Data Mining?

• Data mining is a process that uses statistics, mathematical, and AI

technologies to extract and identify useful information and subsequent
knowledge (or patterns) from large sets of data.

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Definition of Data Mining
• The nontrivial process of identifying valid, novel, potentially useful,
and ultimately understandable patterns in data stored in structured
databases. -- Fayyad et al., (1996)
• Keywords in this definition: Process, nontrivial, valid, novel, potentially
useful, understandable.
• Other names: knowledge extraction, pattern analysis, knowledge
discovery, information harvesting, pattern searching, data dredging.

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Opening Vignette
Miami-Dade Police Department Is Using Predictive
Analytics to Foresee and Fight Crime

• Predictive analytics in law enforcement

– Policing with less
– New thinking on cold cases
– The big picture starts small
– Success brings credibility
– Just for the facts
– Safer streets for smarter cities

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Data Mining Concepts and Definitions:
Why Data Mining?
• More intense competition at the global scale.
• Recognition of the value in data sources.
• Availability of quality data on customers, vendors, transactions, Web,
etc.
• Consolidation and integration of data repositories into data
warehouses.
• The exponential increase in data processing and storage capabilities.
• Decrease in hardware and software for data storage & processing
costs.
• Movement toward conversion of information resources into nonphysical
form.

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Data Mining Is a Blend of Multiple
Disciplines
Figure 4.1 Data Mining Is a Blend of Multiple Disciplines.

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Data Mining Characteristics & Objectives
• Source of data for DM is often a consolidated data warehouse (not
always!).
• DM environment is usually a client-server or a Web-based information
systems architecture.
• Data is the most critical ingredient for DM which may include
soft/unstructured data.
• The miner is often an end user
• Striking it rich requires creative thinking
• Data mining tools’ capabilities and ease of use are essential (Web,
parallel processing, etc.)

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How Data Mining Works
• DM extract patterns from data
– Pattern? A mathematical (numeric and/or symbolic) relationship among
data items

• Types of patterns
– There are four different types of patterns:

 Prediction: tell the nature of future occurrences of certain

events based on what has happened in the past, such as
predicting the winner of the Super Bowl or forecasting the
absolute temperature of a particular day.

 Association: find the commonly co-occurring groupings of

things, such as baby formula and diapers going together in
market-basket analysis.

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 How Data Mining Works
• Types of patterns (continued)

 Clusters (or segmentation): identify natural groupings of

things based on their known characteristics, such as
assigning customers in different segments based on their
demographics and past purchase behaviors.

 Sequential relationships: discover time-ordered events,

such as predicting that an existing banking customer who
already has a checking account will open a savings account
followed by an investment account within a year.

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A Taxonomy for Data Mining
Figure 4.2 A Simple
Taxonomy for Data
Mining Tasks,
Methods, and
Algorithms.

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Other Data Mining Patterns/Tasks
• Time-series forecasting
– Part of the sequence or link analysis?
• Visualization
– Another data mining task?
• Data Mining versus Statistics
– Are they the same?
– What is the relationship between the two?

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Data Mining Applications (1 of 4)

• Customer Relationship Management

– Maximize return on marketing campaigns
– Improve customer retention (churn analysis)
– Maximize customer value (cross-, up-selling)
– Identify and treat most valued customers
• Banking & Other Financial
– Automate the loan application process
– Detecting fraudulent transactions
– Maximize customer value (cross-, up-selling)
– Optimizing cash reserves with forecasting

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Data Mining Applications (2 of 4)

• Retailing and Logistics

– Optimize inventory levels at different locations
– Improve the store layout and sales promotions
– Optimize logistics by predicting seasonal effects
– Minimize losses due to limited shelf life
• Manufacturing and Maintenance
– Predict/prevent machinery failures
– Identify anomalies in production systems to optimize the use
manufacturing capacity
– Discover novel patterns to improve product quality

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Data Mining Applications (3 of 4)

• Brokerage and Securities Trading

– Predict changes on certain bond prices
– Forecast the direction of stock fluctuations
– Assess the effect of events on market movements
– Identify and prevent fraudulent activities in trading
• Insurance
– Forecast claim costs for better business planning
– Determine optimal rate plans
– Optimize marketing to specific customers
– Identify and prevent fraudulent claim activities

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Data Mining Applications (4 of 4)

• Computer hardware and software

• Science and engineering
• Government and defense
• Homeland security and law enforcement
• Travel, entertainment, sports
• Healthcare and medicine
• Sports,… virtually everywhere…

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Data Mining Process

• A manifestation of the best practices

• A systematic way to conduct DM projects
• Moving from Art to Science for DM project
• Everybody has a different version
• Most common standard processes:
– CRISP-DM (Cross-Industry Standard Process for Data Mining)
– SEMMA (Sample, Explore, Modify, Model, and Assess)
– KDD (Knowledge Discovery in Databases)

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Data Mining Process: CRISP-DM (1 of 2)

• Cross Industry Standard Process for Data Mining

• Proposed in 1990s by a European consortium
• Composed of six consecutive phases

– Step 1: Business Understanding  Accounts for


– Step 2: Data Understanding  ~85% of total
– Step 3: Data Preparation  project time

– Step 4: Model Building
– Step 5: Testing and Evaluation
– Step 6: Deployment

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Data Mining Process: CRISP-DM (2 of 2)

• Figure 4.3 The Six-Step

CRISP-DM Data Mining
Process. 
• The process is highly
repetitive and
experimental (DM: art
versus science?)

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Data Mining Process: SEMMA

Figure 4.5 SEMMA Data Mining Process.

• Developed by SAS Institute

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Data Mining Process: KD D
Figure 4.6 K DD (Knowledge Discovery in Databases)
Process.

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What Data Mining Methodology are you
using?
Figure 4.7 Ranking of Data Mining Methodologies/Processes.

Source: Used with permission from KDnuggets.com.

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Application Case 4.4
Data Mining Helps in Cancer Research
Questions for Discussion
1. How can data mining be
used for ultimately curing
illnesses like cancer?
2. What do you think are the
promises and major
challenges for data miners
in contributing to medical
and biological research
endeavors?

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Best Algorithms based on type of DM Task
• Depending on the business need, different types of data mining tasks
can be used: prediction, clustering, or association.

• Most popular algorithms to be used based on type of task:

1. decision trees for classification (prediction),
2. k-means for clustering (segmentation),
3. Apriori algorithm for association rule mining.

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Data Mining Methods for Prediction:

• Classification versus regression

– Classification – what is being predicted is a class label
 weather: sunny, cloudy, rainy
 credit approval: good, bad credit risk

– Regression: what is being predicted is a numeric value

 Temperature: 31
 Number of attendees: 100,000

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Data Mining Methods: Classification

• Most frequently used DM method

• Part of the machine-learning family

• Employ supervised learning

• Learn from past data, classify new data

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Data Mining Methods: Classification
• The output variable is categorical (nominal or ordinal) in nature
– Nominal data:
 data that can be labelled or classified into mutually exclusive
categories within a variable.
 Categories cannot be ordered in a meaningful way.
 Example, for the nominal variable of preferred mode of
transportation, you may have the categories of car, bus, train, tram or
bicycle.
– Ordinal data:
 statistical data type where the variables have natural, ordered
categories
 Example: For a grading system: excellent, very good, good, poor;
– or for winner in a race: first, second, third.

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Data Mining Methods: Classification

• Two-step Methodology of classification-type prediction involves:

– Model development/training
 A collection of input data (variables), including the predicted
actual known class labels (for loans approval as an example:
good, risky) is used for building and train the model.
– Model testing/deployment
 The model is tested against the holdout sample for accuracy
assessment and eventually deployed for actual use where it is
to predict classes of new data instances (where the class label
is unknown).

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Estimation Methodologies for
Classification: Single/Simple Split
• Simple split (or holdout or test sample estimation)
– Split the data into 2 mutually exclusive sets: training (~70%) and
testing (30%)

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Estimation Methodologies for
Classification: k-Fold Cross Validation
• Data is split into k mutual subsets and k number training/testing
experiments are conducted

Figure 4.10 A Graphical Depiction of k-Fold Cross-Validation.

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Accuracy of Classification Models
• In classification problems, the primary source for accuracy
estimation is the confusion matrix (or, classification matrix)

TP  TN
Accuracy 
TP  TN  FP  FN

TP
True Positive Rate 
TP  FN
TN
True Negative Rate 
TN  FP

TP TP
Precision  Recall 
TP  FP TP  FN

Figure 4.8 Matrix for tabulation of two-classification results

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Classification Techniques
• Decision tree analysis
• Statistical analysis
• Neural networks
• Support vector machines
• Case-based reasoning
• Bayesian classifiers
• Genetic algorithms
• Rough sets

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Decision Trees
• Employs a divide-and-conquer method
• Recursively divides a training set until each division consists of
examples from one class:

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

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Decision Trees
• DT algorithms mainly differ on
1. Splitting criteria
 Which variable, what value, etc.

2. Stopping criteria
 When to stop building the tree

3. Pruning (generalization method)

 Which parts of the tree to remove

• Most popular DT algorithms include

– ID3, C4.5, C5; CART; CHAID; M5

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Decision Trees

Source:
https://www.softwaretestinghelp.com/decision-tree-algorithm-examples-data-mining/

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Decision Trees

Source of image:
https://www.softwaretestinghelp.com/decision-tree-algorithm-examples-data-mining/

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Decision Trees
• Example: Should I play golf or not?

Source of image:
https://www.softwaretestinghelp.com/decision-tree-algorithm-examples-data-mining/

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Decision Trees
• Example: Should I give a loan or not?

Source of image:
https://www.softwaretestinghelp.com/decision-tree-algorithm-examples-data-mining/

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Cluster Analysis for Data Mining
(1 of 4)
• Used for automatic identification of natural groupings of
things
• Part of the machine-learning family
• Employ unsupervised learning
• Learns the clusters of things from past data, then assigns
new instances
• There is not an output/target variable
• In marketing, it is also known as segmentation

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Cluster Analysis for Data Mining
(2 of 4)
• Clustering results may be used to
– Identify natural groupings of customers
– Identify rules for assigning new cases to classes for
targeting/diagnostic purposes
– Provide characterization, definition, labeling of
populations
– Decrease the size and complexity of problems for
other data mining methods
– Identify outliers in a specific domain (e.g., rare-event
detection)

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Cluster Analysis for Data Mining
(3 of 4)
• Analysis methods
– Statistical methods such as k-means, k-modes, and so
on.
– Neural networks (adaptive resonance theory [ART],
self-organizing map [SO M])
– Fuzzy logic (e.g., fuzzy c-means algorithm)
– Genetic algorithms
• How many clusters?

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Cluster Analysis for Data Mining
(4 of 4)
• k-Means Clustering Algorithm
– k: pre-determined number of clusters
– Algorithm (Step 0: determine value of k)
Step 1: Randomly generate k random points as initial
cluster centers.
Step 2: Assign each point to the nearest cluster center.
Step 3: Re-compute the new cluster centers.
Repetition step: Repeat steps 3 and 4 until some
convergence criterion is met (usually that the
assignment of points to clusters becomes stable).

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Cluster Analysis for Data Mining -
k-Means Clustering Algorithm
Figure 4.13 A Graphical Illustration of the Steps in the
k-Means Algorithm.

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Association Rule Mining (1 of 7)
• A very popular DM method in business
• Finds interesting relationships (affinities) between
variables (items or events)
• Part of machine learning family
• Employs unsupervised learning
• There is no output variable
• Also known as market basket analysis or affinity analysis

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Association Rule Mining (2 of 7)
• Input: the simple point-of-sale transaction data
• Output: Most frequent affinities among items
• Example: according to the transaction data…
“Customer who bought a lap-top computer and a virus
protection software, also bought extended service plan
70 percent of the time."
• How do you use such a pattern/knowledge?
– Put the items next to each other
– Promote the items as a package
– Place items far apart from each other!

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Association Rule Mining (3 of 7)
• A representative applications of association rule mining
include
– In business: cross-marketing, cross-selling, store
design, catalog design, e-commerce site design,
optimization of online advertising, product pricing, and
sales/promotion configuration
– In medicine: relationships between symptoms and
illnesses; diagnosis and patient characteristics and
treatments (to be used in medical DSS); and genes
and their functions (to be used in genomics projects)
– …

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Association Rule Mining (4 of 7)
• Are all association rules interesting and useful?
A Generic Rule: X  Y [S%, C%]
X, Y: products and/or services
X: Left-hand-side (LHS) ~ antecedent
Y: Right-hand-side (RHS) ~ consequent
S: Support: how often X and Y go together
C: Confidence: how often Y go together with the X
Example:
In the total number of transactions data:
{Laptop Computer, Antivirus Software}  {Extended Service Plan}
[30%, 70%]
i.e., laptops and antivirus software were present in 30% of total
transactions, and in cases where laptops and antivirus software were
present also extended service plan was found 70% of the time.

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Association Rule Mining (5 of 7)
Example:
In the total number of transactions data:
{Laptop Computer, Antivirus Software}  {Extended
Service Plan} [30%, 70%]
i.e., laptops and antivirus software were present in 30% of total
transactions, and in cases where laptops and antivirus software
were present also extended service plan was found 70% of the
time.

If total transactions = 100,

- Number of times laptops and antivirus were found together 30
times
- For these 30 times, it was found that extended service plan was
present 21 times: 21/30 = 70%

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Association Rule Mining (6 of 7)
• Several algorithms are developed for discovering
(identifying) association rules
– Apriori
– Eclat
– FP-Growth
– + Derivatives and hybrids of the three
• The algorithms help identify the frequent item sets, which
are, then converted to association rules

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Association Rule Mining (7 of 7)
• Apriori Algorithm
– Finds subsets that are common to at least a minimum
number of the itemsets
– Uses a bottom-up approach
 frequent subsets are extended one item at a time
(the size of frequent subsets increases from one-
item subsets to two-item subsets, then three-item
subsets, and so on), and
 groups of candidates at each level are tested
against the data for minimum support. (see the
figure)  --

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Association Rule Mining Apriori
Algorithm
Figure 4.14 A Graphical Illustration of the Steps in the
Apriori Algorithm.

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Data Mining Software Tools
Figure 4.15 Popular Data Mining Software Tools (Poll Results).
• Commercial
– IBM SPSS Modeler
(formerly Clementine)
– SAS Enterprise Miner
– Statistica - Dell/Statsoft
– … many more
• Free and/or Open Source
– KNIME
– RapidMiner
– Weka
– R, …

Source: Used with permission from KDnuggets.com.

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Application Case 4.6 (1 of 4)
Data Mining Goes to Hollywood: Predicting
Financial Success of Movies
• Goal: Predicting financial success of Hollywood movies
before the start of their production process
• How: Use of advanced predictive analytics methods.
• Results: promising.

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Application Case 4.6 (2 of 4)
Data Mining Goes to Hollywood: Predicting
Financial Success of Movies
A Typical Classification Problem
Table 4.3 Movie Classification based on Receipts
Class No. 1 2 3 4 5 6 7 8 9

Range >1 >1 >10 >20 >40 >65 >100 >150 >200
(in millions of dollars) (Flop) <610 <20 <640 <665 <6100 <6150 <6200 (Blockbuster)

Table 4.4 Summary of Independent Variables

Independent Variable Number of Values Possible Values
MPA A Rating 5 G, PG, PG-13, R, NR
Competition 3 High, medium, low
Star value 3 High, medium, low
Genre 10 Sci-Fi, Historic Epic Drama, Modern Drama,
Politically Related, Thriller, Horror, Comedy,
Cartoon, Action, Documentary
Special effects 3 High, medium, low
Sequel 2 Yes, no
Number of screens 1 A positive integer between 1 and 3,876

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Application Case 4.6 (3 of 4)
Data Mining Goes to Hollywood: Predicting
Financial Success of Movies
FIGURE 4.16 Process
Flow Screenshot for the
Box-Office Prediction
System.

The DM Process Map in IB

M SPSS Modeler

Source: Reprint Courtesy of International Business Machines Corporation, © International

Business Machines Corporation.
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Application Case 4.6 (4 of 4)
Data Mining Goes to Hollywood: Predicting
Financial Success of Movies

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