Camm 4e Ch09 PPT

Business Analytics
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Predictive Data Mining
Chapter 9
Introduction (Slide 1 of 2)
• An observation, or record, is the set of recorded values of variables
associated with a single entity.
• Supervised learning: Data mining methods for predicting an
outcome based on a set of input variables, or features.
• Supervised learning can be used for:
• Estimation of a continuous outcome.
• Classification of a categorical outcome.
Introduction (Slide 2 of 2)
The data mining process comprises the following steps:
1. Data sampling.
2. Data preparation.
3. Data partitioning.
4. Model construction.
5. Model assessment.
Data Sampling, Preparation, and
Partitioning
Data Sampling, Preparation, and Partitioning
(Slide 1 of 7)
• When dealing with large volumes of data, best practice is to extract

a representative sample for analysis.
• A sample is representative if the analyst can make the same
conclusions from it as from the entire population of data.
• The sample of data must be large enough to contain significant
information, yet small enough to be manipulated quickly.
• Data mining algorithms typically are more effective given more data.
(Slide 2 of7)
• When obtaining a representative sample, it is generally best to

include as many variables as possible in the sample.
• After exploring the data with descriptive statistics and visualization,
the analyst can eliminate variables that are not of interest.
• Data mining applications deal with an abundance of data that
simplifies the process of assessing the accuracy of data-based
estimates of variable effects.
(Slide 3 of 7)
• Overfitting occurs when the analyst builds a model that does a great
job of explaining the sample of data on which it is based, but fails to
accurately predict outside the sample data.
• We can use the abundance of data to guard against the potential for
overfitting by splitting the data set into different subsets for:
• The training (or construction) of candidate models.
• The validation (or performance comparison) of candidate models
• The testing (or assessment) of future performance of a selected
model.
(Slide 4 of 7)
Statistic Holdout Method

• Training set: Consists of the data used to build the candidate
models.
• Validation set: The data set to which the promising subset of
models is applied to identify which model is the most accurate at
predicting observations that were not used to build the model.
• Test set: The data set to which the final model should be applied to
estimate this model’s effectiveness when applied to data that have
not been used to build or select the model.
(Slide 5 of 7)
k-Fold Cross-Validation
• k-Fold Cross-Validation: A robust procedure to train and validate
models in which observations to be used to train and validate the
model are repeatedly randomly divided into k subsets called folds. In
each iteration, one fold is designated as the validation set and the
remaining k-1 folds are designated as the training set. The results of
the iterations are then combined and evaluated.
(Slide 6 of 7)
k-Fold Cross-Validation
• A special case of k-fold cross-validation is leave-one-out cross-
validation.
• In this case, the number of folds equals the number of observations
in the combined training and validation data.
(Slide 7 of 7)
Class Imbalanced Data

• There are two basic sampling approaches for modifying the class
distribution of the training set:
• Undersampling: Balances the number of Class 1 and Class 0
observations in a training set by removing majority class
observations from the training set.
• Oversampling: Balances the number of Class 1 and Class 0
observations in a training set by inserting copies of minority class
observations into the training set.
Performance Measures
Evaluating the Classification of Categorical Outcomes
Evaluating the Estimation of Continuous Outcomes
Performance Measures (Slide 1 of 19)
Evaluating the Classification of Categorical Outcomes:
• By counting the classification errors on a sufficiently large validation set
and/or test set that is representative of the population, we will generate
an accurate measure of the model’s classification performance.
• Classification confusion matrix: Displays a model’s correct and incorrect
classifications.
Table 9.1: Confusion Matrix
• Many measures of classification performance are based on the confusion

matrix.
• Overall error rate: Percentage of misclassified observations:
n10  n01
Overall error rate 
n11  n10  n01  n00
Evaluating the Classification of Categorical Outcomes (cont.):
• One minus the overall error rate is often referred to as the accuracy of
the model.
• While overall error rate conveys an aggregate measure of
misclassification, it counts as misclassifying an actual Class 0 observation
as a Class 1 observation (a false positive) the same as misclassifying an
actual Class 1 observation as a Class 0 observation (a false negative).
• To account for the asymmetric costs in misclassification, we define the
error rate with respect to the individual classes:
• Class 1 error rate = n10
n11  n10
• Class 0 error rate =

n01
n01  n00
• Cutoff value: Probability value used to understand the tradeoff between
Class 1 error rate and Class 0 error rate.
Probability Probability
Table 9.2: Classification Actual Class of Class 1 Actual Class of Class 1
Probabilities 1 1.00 0 0.66
1 1.00 0 0.65
0 1.00 1 0.64
1 1.00 0 0.62
0 1.00 0 0.60
0 0.90 0 0.51
1 0.90 0 0.49
0 0.88 0 0.49
0 0.88 1 0.46
1 0.88 0 0.46
Probabilities (cont.) 0 0.87 1 0.45
0 0.87 1 0.45
0 0.87 0 0.45
0 0.86 0 0.44
1 0.86 0 0.44
0 0.86 0 0.30
0 0.86 0 0.28
0 0.85 0 0.26
0 0.84 1 0.24
0 0.84 0 0.22
Probabilities (cont.) 0 0.83 0 0.21
0 0.68 0 0.04
0 0.67 0 0.04
0 0.67 0 0.01
0 0.67 0 0.00
Table 9.3: Confusion Matrices for Various Cutoff Values
Table 9.3: Classification Confusion Matrices and Error Rates for Various
Cutoff Values (cont.)
Table 9.3: Classification Confusion Matrices and Error Rates for Various
Cutoff Values (cont.)
Figure 9.1:
Classification Error
Rates vs. Cutoff Value
• Cumulative lift chart: Compares the number of actual Class 1
observations identified if considered in decreasing order of their
estimated probability of being in Class 1 and compares this to the
number of actual Class 1 observations identified if randomly selected.
• Decile-wise lift chart: Another way to view how much better a classifier is
at identifying Class 1 observations than random classification.
• Observations are ordered in decreasing probability of Class 1 membership
and then considered in 10 equal-sized groups.
Figure 9.2: Cumulative and Decile-Wise Lift Charts
• The ability to correctly predict Class 1 (positive) observations is
commonly expressed as sensitivity, or recall, and is calculated as:
n11
Sensitivity  1  Class 1 error rate 
n11  n10
• The ability to correctly predict Class 0 (negative) observations is

commonly expressed as specificity and is calculated as:
n00
Specificity  1  Class 0 error rate 
n11  n10
• Precision is a measure that corresponds to the proportion of
observations predicted to be Class 1 by a classifier that are actually in
Class 1:
n11
Precision =
n11  n01
• The F1 Score combines precision and sensitivity into a single measure

and is defined as:
2n11
F1 Score =
2n11  n01  n10
• The receiver operating characteristic (ROC) curve is an alternative
graphical approach for displaying the tradeoff between a classifier’s ability
to correctly identify Class 1 observations and its Class 0 error rate.
• In general, we can evaluate the quality of a classifier by computing the area
under the ROC curve, often referred to as the AUC.
• The greater the area under the ROC curve, i.e., the larger the AUC, the
better the classifier performs.
Figure 9.3:
Receiver Operating
Characteristic
(ROC) Curve
Evaluating the Estimation of Continuous Outcomes:
• The measures of accuracy are some function of the error in estimating an
outcome for an observation i.
• Two common measures are:
 i 1 ei n
n
• Average error =
 i 1 i n
n2
• Root mean squared error (RMSE) = e
(ei  error in estimating an outcome for observation i)
The average error estimates the bias in a model’s predictions:
• If the average error is negative, then the model tends to overestimate the value
of the outcome variable.
• If the average error is positive, the model tends to underestimate.
Table 9.4: Computer Error in Estimates of Average Balance for 10
Customers
Logistic Regression
Logistic Regression (Slide 1 of 8)
• Logistic regression attempts to classify a binary categorical outcome
(y = 0 or 1) as a linear function of explanatory variables.
• A linear regression model fails to appropriately explain a categorical
outcome variable.
Figure 9.4: Scatter Chart
and Simple Linear
Regression Fit for Oscars
Example
Figure 9.5: Residuals for Simple
Linear Regression on Oscars Data
An unmistakable pattern of
systematic misprediction suggests
that the simple linear regression
model is not appropriate.
Odds is a measure related to probability.
If an estimate of the probability of an event is pˆ , then the equivalent
odds measure is pˆ 1  pˆ .
The odds metric ranges between zero and positive infinity.

We eliminate the fit problem by using logit, ln  pˆ 1  pˆ  .
Estimating the logit with a linear function results in the estimated

logistic regression model.
• Logistic regression model:
 pˆ 
ln    b0  b1 x1    bq xq
 1  pˆ 
Given a set of explanatory variables, a logistic regression algorithm

determines values of b0 , b1 , ,bq that best estimate the log odds.
Figure 9.6: Logistic S-Curve for
Oscars Example
• Logistic regression classifies an observation by using the logistic
function to compute the probability of an observation belonging to
Class 1 and then comparing this probability to a cutoff value.
• If the probability exceeds the cutoff value, the observation is
classified as Class 1 and otherwise it is classified as Class 0.
• While a logistic regression model used for prediction should
ultimately be judged based on its classification accuracy on
validation and test sets, Mallow’s C p statistic is a measure
commonly computed by statistical software that can be used to
identify models with promising sets of variables.
Table 9.5: Predicted Probabilities by Logistic Regression for Oscars
Example
Total Number of Oscar Predicted Probability of

Nominations Winning Predicted Class Actual Class
14 0.89 Winner Winner
11 0.58 Winner Loser
10 0.44 Loser Loser
6 0.07 Loser Winner
k-Nearest Neighbors
Classifying Categorical Outcomes with k-Nearest Neighbors
Estimating Continuous Outcomes with k-Nearest Neighbors
k-Nearest Neighbors (Slide 1 of 7)
• k-Nearest Neighbors (k-NN): This method can be used either to
classify a categorical outcome or to estimate a continuous outcome.
• k-NN uses the k most similar observations from the training set,
where similarity is typically measured with Euclidean distance.
Classifying Categorical Outcomes with k-Nearest Neighbors:
• A nearest-neighbor classifier is a “lazy learner” that directly uses the
entire training set to classify observations in the validation and test sets.
• The value of k can plausibly range from 1 to n, the number of
observations in the training set.
• If k = 1, then the classification of a new observation is set to be equal to the
class of the single most similar observation from the training set.
• If k = n, then the new observation’s class is naïvely assigned to the most
common class in the training set.
Table 9.6: Training Set Observations for k-NN Classifier
Observation Average Balance Age Loan Default
1 49 38 1
2 671 26 1
3 772 47 1
4 136 48 1
5 123 40 1
6 36 29 0
7 192 31 0
8 6,574 35 0
9 2,200 58 0
10 2,100 30 0
Average: 1,285 38.2
Standard Deviation: 2,029 10.2
Figure 9.7: Scatter Chart for k-NN Classification
% of Class 1
Table 9.7: Classification of k Neighbors Classification
Observation with Average Balance 1 1.00 1
= 900 and Age = 28 for Different 2 0.50 1
Values of k 3 0.33 0
4 0.25 0
5 0.40 0
6 0.50 1
7 0.57 1
8 0.63 1
9 0.56 1
10 0.50 1
Estimating Continuous Outcomes with k-Nearest Neighbors:
• When k-NN is used to estimate a continuous outcome, a new
observation’s outcome value is predicted to be the average of the
outcome values of its k-nearest neighbors in the training set.
• The value of k can plausibly range from 1 to n, the number of
observations in the training set.
Figure 9.8: Scatter Chart for k-NN Estimation
Table 9.8: Estimation Average k Average Balance Estimate
Balance for Observation with 1 $36
Age = 28 for Different Values of k 2 $936
3 $936
4 $750
5 $1,915
6 $1,604
7 $1,392
8 $1,315
9 $1,184
10 $1,285
Classification and Regression
Trees
Classifying Categorical Outcomes with a Classification Tree
Estimating Continuous Outcomes with a Regression Tree
Ensemble Methods
Classification and Regression Trees
(Slide 1 of 20)
• Classification and regression trees (CART) successively partition a

data set of observations into increasingly smaller and more
homogeneous subsets.
• At each iteration of the CART method, a subset of observations is
split into two new subsets based on the values of a single variable.
• CART method can be thought of as a series of questions that
successively narrow down observations into smaller and smaller
groups of decreasing impurity, which is the measure of the
heterogeneity in a group of observations’ outcome classes or
outcome values.
(Slide 2 of 20)
Classifying Categorical Outcomes with a Classification Tree:

• Classification trees: The impurity of a group of observations is based on
the proportion of observations belonging to the same class.
• There is zero impurity if all observations in a group are in the same class.
• After a final tree is constructed, the classification of a new observation is
then based on the final partition into which the new observation belongs.
(Slide 3 of 20)
Classifying a Categorical Outcome with a Classification Tree (cont.):

• To explain how a classification tree categorizes observations:
• We use a small sample of data from DemoHHI consisting of 46
observations.
• Only two variables from HHI—percentage of the $ character and
percentage of the ! Character.
(Slide 4 of 20)
Figure 9.9: Construction Sequence

of Branches in a Classification Tree
(Slide 5 of 20)
Figure 9.10: Geometric Illustration

of Classification Tree Partitions
The final partitioning resulting
from the sequence of variable
splits.
(Slide 6 of 20)
Figure 9.11: Classification Tree

with One Pruned Branch
(Slide 7 of 20)
Table 9.9: Classification Error Rates on Sequence of Pruned Trees

% Classification Error on Training % Classification Error on Validation
Number of Decision Nodes Set Set
0 43.5 39.4
1 8.7 20.9
2 8.7 20.9
3 8.7 20.9
4 6.5 20.9
5 4.3 21.3
6 2.2 21.3
7 0 21.6
(Slide 8 of 20)
Figure 9.12: Best-Pruned Classification Tree
(Slide 9 of 20)
Estimating Continuous Outcomes with a Regression Tree:
• A regression tree successively partitions observations of the training set
into smaller and smaller groups in a similar fashion as a classification tree.
• The differences are:
• A regression tree bases the impurity of a partition based on the variance of
the outcome value for the observations in the group.
• After a final tree is constructed, the estimated outcome value of an
observation is based on the mean outcome value of the partition in which the
new observation belongs.
(Slide 10 of 20)
Figure 9.13: Geometric

Illustration of First Six
Rules of a Regression
Tree
(Slide 11 of 20)
Ensemble Methods:
• In an ensemble method, predictions are made based on the combination
of a collection of models.
• Two necessary conditions for an ensemble to perform better than a
single model:
1. Individual base models are constructed independently of each other.
2. Individual models perform better than just randomly guessing.
(Slide 12 of 20)
Ensemble Methods (cont.):
• Two primary steps to an ensemble approach:
1. The development of a committee of individual base models.
2. The combination of the individual base models’ predictions to form a composite
prediction.
• A classification or estimation method is unstable if relatively small changes in
the training set cause its predictions to fluctuate.
• Three different ways to construct an ensemble of classification or regression
trees:
• Bagging.
• Boosting.
• Random forests.
(Slide 13 of 20)
• In the bagging approach, the committee of individual base models is
generated by first constructing multiple training sets by repeated random
sampling of the n observations in the original data with replacement.
Table 9.10: Original 10-Observation Training Data
Age 29 31 35 38 47 48 53 54 58 70
Loan
default 0 0 0 1 1 1 1 0 0 0
(Slide 14 of 20)
• The boosting method generates is committee of individual base models
by sampling multiple training sets.
• Boosting iteratively adapts how it samples the original data when
constructing a new training set based on the prediction error of the
models constructed on the previous training sets.
• Random forests can be viewed as a variation of bagging specifically
tailored for use with classification or regression trees.
(Slide 15 of 20)
Table 9.11: Bagging: Generation of 10 New Training Sets and Corresponding
Classification Trees
(Slide 16 of 20)
Classification Trees (cont.)
(Slide 17 of 20)
Classification Trees (cont.)
(Slide 18 of 20)
Table 9.12: Classification of 10 Observations from Validation Set with Bagging Ensemble
Overall
Error
Age 26 29 30 32 34 37 42 47 48 54 Rate
Loan
default 1 0 0 0 0 1 0 1 1 0
Tree 1 0 0 0 0 0 1 1 1 1 1 30%
Tree 2 0 0 0 0 0 0 0 0 0 0 40%
Tree 3 0 0 0 0 0 1 1 1 1 1 30%
Tree 4 0 0 0 0 0 1 1 1 1 1 30%
Tree 5 0 0 0 0 0 0 1 1 1 1 40%
Tree 6 1 1 1 1 1 1 1 1 1 0 50%
Tree 7 1 1 1 1 1 1 1 1 1 0 50%
(Slide 19 of 20)
Table 9.12: Classification of 10 Observations from Validation Set with Bagging Ensemble
Overall
Error
Age 26 29 30 32 34 37 42 47 48 54 Rate
Loan
default 1 0 0 0 0 1 0 1 1 0
Tree 8 1 1 1 1 1 1 1 1 1 0 50%
Tree 9 1 1 1 1 1 1 1 1 1 0 50%
Tree 10 0 0 0 0 0 0 0 0 0 0 40%
Average
Vote 0.4 0.4 0.4 0.4 0.4 0.7 0.8 0.8 0.8 0.4
Bagging
Ensemble 0 0 0 0 0 1 1 1 1 0 20%
(Slide 20 of 20)
• For most problems, the predictive accuracy of boosting ensembles exceeds the
predictive performance of bagging ensembles.
• Boosting achieves its performance advantage because:
• It evolves its committee of models by focusing on observations that are
mispredicted.
• The member models’ votes are weighted by their accuracy.
• Boosting is more computationally expensive than bagging.
• There is no adaptive feedback in a bagging approach, so all m training sets are
corresponding models can be implemented simultaneously.
• Random forests approach has performance similar to boosting, but maintains
the computational simplicity of bagging.
End of Chapter 9

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Business Analytics

• When dealing with large volumes of data, best practice is to extract

• When obtaining a representative sample, it is generally best to

Statistic Holdout Method

Class Imbalanced Data

• Many measures of classification performance are based on the confusion

• Class 0 error rate =

• The ability to correctly predict Class 0 (negative) observations is

• The F1 Score combines precision and sensitivity into a single measure

The odds metric ranges between zero and positive infinity.

Estimating the logit with a linear function results in the estimated

Given a set of explanatory variables, a logistic regression algorithm

Total Number of Oscar Predicted Probability of

• Classification and regression trees (CART) successively partition a

Classifying Categorical Outcomes with a Classification Tree:

Classifying a Categorical Outcome with a Classification Tree (cont.):

Figure 9.9: Construction Sequence

Figure 9.10: Geometric Illustration

Figure 9.11: Classification Tree

Table 9.9: Classification Error Rates on Sequence of Pruned Trees

Figure 9.12: Best-Pruned Classification Tree

Figure 9.13: Geometric

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