Magazine article Risk Management

The New Math

Magazine article Risk Management

The New Math

Article excerpt

Bringing Predictive Analytics into the Mainstream

How can banks predict and thwart complex fraud schemes involving dispersed participants7 How can retailers correctly pnce products in reat-time to target the preferences of select customers? How can companies predict the outcome of multi-faceted events such as merger and acquisition sctrvity7 And how can pubric health officiate more accurately predict the progression and outcome of a disease7 Proponents at predictive analytics say their discipline can provide the answers to these and many ether questions for a range of industries, each eager for state-of-the-art tools to aid in decision-making and strategic risk management

The New Math

Predictive analytics is a practice that applies statistics, advanced mathematics and a mix of technologies to analyze large quantities of data and past events to identify patterns and build forecasts about future events. Jt has been supercharged by techniques that include crowd-sourcing, machine learning capabilities-the ability of machines to learn without being programmed-and improved big data aggregation technologies. Some predictive analytics firms also offer platforms that tour easy-touse interfaces designed for a broader base of users than just data scientists.

* lraditionally, predictive analytics was thought oías something utilised by a secret group of specialists locked away in a room," said Paul Ross, vicepresident of product maikcring at Altcryx, a four-year old predictive analytics startup based in Irvine, Calif., and backed by SAI' Ventures and Thomson Reuters. It helps a tange of companies-including McDonald's and Time Warnet Cableanalyze customer preferences, choices and customer attrition risks.

Platforms such as Alteryx's, however, are also making it easier fot everyday people to access the predictive analytics process. '[Predictive analytics] will now be in the hands of more organizations, with mote and more people on the frontlines of business adopting its use," Rots said.

Indeed, while only 13% of companies had a predictive analytics system in place in 2012, research firm Gaitncr projects that 70% of the most profitable companies will employ either predictive analytics or more real-time collaboration techniques to ensure competitive advantage by 2016,

Risk management teams are particularly seeking out these capabilities. A global survey conducted by the IBM Institute fot Business Value found chat <17% of organizations across industries now use predictive analytics to support business insight for risk purposes. "I was personally impressed with how many are using predictive analytics, fot risk management," said IBM strategy and analytics expert Karen Bu rner.

"Risk is one of those areas that is a key beneficiary of advances in predictive analytics due to the ability ro identify and predict vulnerabilities, instances of fraud, security breaches and the quality oi control systems and governance," said Rita Sal lam, a icsearch vice president and analyst at Gartner. "It is also one area where companies have high intentions, over the next several years, ro invest in the technology and increase their usage."

The Winning Solution

One factor that may be limit! ng broader use, however, is the shortage oi data scientists-people with specialized training who understand the predictive techniques and model types-and can help others make savvy use of sonic of die more sophisticated tools.

San Francisco-based start-up Kagglc aims to address this issue through a type of data scientist outsourcing. Tire fouryear-old, venture-backed firm hosts online competitions for its community oj more than 150,000 data scientists in the academic, corporate and government arenas from over 100 countries.

Scientists who join the community are invited to compere in a range of competitions that involve building the best predictive model for large quandries of data. In doing so, they aim ro answer complex questions such as: What is the best way to price my product for a targeted audience? …

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