Example of Classification Model in Predictive
Analytics Techniques
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Classification models are a type of predictive
analytics technique used to predict a categorical
outcome based on one or more input variables.
Here's an example:
Example: Credit Risk Assessment
A bank wants to develop a model to predict whether
a loan applicant is likely to default on their loan
payments. The bank collects data on various
characteristics of the applicants, such as:
Credit score
Income
Employment history
Debt-to-income ratio
Loan amount
The target variable is "Default" or "No Default". The
bank uses a classification model to predict the
likelihood of default based on the input variables.
Types of Classification Models:
1. Logistic Regression: A popular algorithm for
binary classification problems, such as predicting
default or no default.
2. Decision Trees: A tree-based model that splits
data into subsets based on input variables.
3. Random Forest: An ensemble model that
combines multiple decision trees to improve
prediction accuracy.
4. Support Vector Machines (SVMs): A powerful
algorithm that finds the optimal hyperplane to
separate classes.
Evaluation Metrics:
1. Accuracy: The proportion of correctly classified
instances.
2. Precision: The proportion of true positives
(defaulters correctly identified).
3. Recall: The proportion of actual defaulters
correctly identified.
4. F1-score: The harmonic mean of precision and
recall. By using classification models, the bank can
predict the likelihood of default and make informed
decisions about loan approvals and interest rates.
Regression Model as Predictive Analytics Technique
Regression models are a type of predictive analytics
technique used to predict continuous outcomes
based on one or more input variables.
Here's an overview:
Types of Regression Models
1. Simple Linear Regression: Predicts a
continuous outcome based on a single input
variable.
2. Multiple Linear Regression: Predicts a
continuous outcome based on multiple input
variables.
3. Polynomial Regression: Predicts a continuous
outcome based on a non-linear relationship between
the input variable(s) and the outcome variable.
How Regression Models Work
1. Model Estimation: The regression model
estimates the relationship between the input
variable(s) and the outcome variable.
2. Coefficient Interpretation: The coefficients of the
input variables represent the change in the outcome
variable for a one-unit change in the input variable,
while holding all other input variables constant.
3. Prediction: The regression model predicts the
outcome variable for new data based on the
estimated relationship.
Applications of Regression Models
1. Predicting Continuous Outcomes: Regression
models are useful for predicting continuous
outcomes, such as stock prices, temperatures, or
energy consumption.
2. Identifying Relationships: Regression models
can identify the relationships between input
variables and the outcome variable, which can
inform business decisions.
3. Forecasting: Regression models can be used for
forecasting future values of a continuous outcome
variable.
Evaluation Metrics
1. Mean Absolute Error (MAE): Measures the
average difference between predicted and actual
values.
2. Mean Squared Error (MSE): Measures the
average squared difference between predicted and
actual values.
3. R-squared: Measures the proportion of variance
in the outcome variable that is explained by the input
variable(s).
Common Regression Algorithms
1. Ordinary Least Squares (OLS): A popular
algorithm for linear regression.
2. Gradient Boosting: An ensemble algorithm that
combines multiple weak models to create a strong
predictive model.
3. Ridge Regression: A regularization technique
that adds a penalty term to the loss function to
prevent overfitting. Regression models are a
powerful tool for predictive analytics, and can be
used in a variety of applications, including finance,
marketing, and operations.
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Example of Computation of Regression Analysis
11EHere's a simple example of computation of
regression analysis:
1. Example: Predicting Sales
Let's say we want to predict sales based on
advertising spend.
We have the following data: | Advertising Spend (x)
| Sales (y)
100 | 200
150 | 300
200 | 400
250 | 500
300 | 600
Step 1: Calculate the Mean of x and y
Mean x: (100 + 150 + 200 + 250 + 300) / 5 = 200
Mean y: (200 + 300 + 400 + 500 + 600) / 5 = 400
Step 2: Calculate the Deviations from the Mean
(x - mean x): (-100, -50, 0, 50, 100)
(y - mean y): (-200, -100, 0, 100, 200)
Step 3: Calculate the Slope (β1) β1 = Σ[(xi - mean
x)(yi - mean y)] / Σ(xi - mean x)^2 = [(-100)(-200) + (-
50)(-100) + (0)(0) + (50)(100) + (100)(200)] / [(-
100)^2 + (-50)^2 + (0)^2 + (50)^2 + (100)^2] =
(20000 + 5000 + 0 + 5000 + 20000) / (10000 + 2500
+ 0 + 2500 + 10000) = 50000 / 25000 = 2
Step 4: Calculate the Intercept (β0) β0 = mean y -
β1 * mean x = 400 - 2 * 200 = 400 - 400 = 0
Step 5: Write the Regression Equation y = β0 +
β1x y = 0 + 2x y = 2x
Step 6: Make Predictions Using the regression
equation, we can predict sales for a given
advertising spend. For example, if the advertising
spend is 225: Sales = 2 * 225 Sales = 450 This is a
simple example of computation of regression
analysis.
In practice, you would use software packages like
Excel, R, or Python to perform regression analysis.
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2. Example: Predicting House Prices
Let's predict house prices based on square footage.
We have:
| Square Footage (x) | House Price | |
| 1000 | 200000 |
| 1200 | 240000 |
| 1500 | 300000 |
| 1800 | 360000 |
| 2000 | 400000 |
Regression Equation y = β0 + β1x
Calculating Coefficients β1 = 200 (slope)
β0 = 0 (intercept)
Regression Equation y = 0 + 200x y = 200x
Predicting House Price
For a house with 2200 square footage:
House Price = 200 * 2200 House Price = 440000
The predicted house price is $440,000.
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