Predictive Analytics vs Data Mining

Technology Cycle:
Data warehousing is a mature technology, with approximately 70 percent of Forrester Research survey respondents indicating they have one in production. Data mining has endured significant consolidation of products since 2000, in spite of initial high-profile success stories, and has sought shelter in encapsulating its algorithms in the recommendation engines of marketing and campaign management software. Statistical inference has been transformed into predictive modelling. As we shall see, the emerging trend in predictive analytics has been enabled by the convergence of a variety of factors.

Technology Hierarchy:
In the technology hierarchy, data warehousing is generally considered an architecture for data management. Of course, when implemented, a data warehouse is a database providing information about (among many other things) what customers are buying or using which products or services and when and where are they doing so. Data mining is a process for knowledge discovery, primarily relying on generalizations of the "law of large numbers" and the principles of statistics applied to them. Predictive analytics emerges as an application that both builds on and delimits these two predecessor technologies, exploiting large volumes of data and forward-looking inference engines, by definition, providing predictions about diverse domains.

Methods:
The method of data warehousing is structured query language (SQL) and its various extensions. Data mining employs the "law of large numbers" and the principles of statistics and probability that address the issues around decision making in uncertainty. Predictive analytics carries forward the work of the two predecessor domains. Though not a silver bullet, better algorithms in operations research, risk minimization and parallel processing, when combined with hardware improvements and the lessons of usability testing, have resulted in successful new predictive applications emerging in the market. (Again, see Figure 1 on predictive analytics enabling technologies.) Widely diverging domains such as the behaviour of consumers, stocks and bonds, and fraud detection have been attacked with significant success by predictive analytics on a progressively incremental scale and scope. The work of the past decade in building the data warehouse and especially of its closely related techniques, particularly parallel processing, are key enabling factors. Statistical processing has been useful in data preparation, model construction and model validation. However, it is only with predictive analytics that the inference and knowledge are actually encoded into the model that, in turn, is encapsulated in a business application.

Definition
This results in the following definition of predictive analytics: Methods of directed and undirected knowledge discovery, relying on statistical algorithms, neural networks and optimization research to prescribe (recommend) and predict (future) actions based on discovering, verifying and applying patterns in data to predict the behavior of customers, products, services, market dynamics and other critical business transactions. In general, tools in predictive analytics employ methods to identify and relate independent and dependent variables - the independent variable being "responsible for" the dependent one and the way in which the variables "relate," providing a pattern and a model for the behavior of the downstream variables.

In data warehousing, the analyst asks a question of the data set with a predefined set of conditions and qualifications, and a known output structure. The traditional data cube addresses: What customers are buying or using which product or service and when and where are they doing so? Typically, the question is represented in a piece of SQL against a relational database. The business insight needed to craft the question to be answered by the data warehouse remains hidden in a black box - the analyst's head. Data mining gives us tools with which to engage in question formulation based primarily on the "law of large numbers" of classic statistics. Predictive analytics have introduced decision trees, neural networks and other pattern-matching algorithms constrained by data percolation. It is true that in doing so, technologies such as neural networks have themselves become a black box. However, neural networks and related technologies have enabled significant progress in automating, formulating and answering questions not previously envisioned. In science, such a practice is called "hypothesis formation," where the hypothesis is treated as a question to be defined, validated and refuted or confirmed by the data.

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