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Knowledge Discovery & Data

process of extracting previously unknown, valid,
and actionable (understandable) information from
large databases
Data mining is a step in the KDD process of
applying data analysis and discovery algorithms

Machine learning, pattern recognition, statistics,

databases, data visualization.
Traditional techniques may be inadequate
large data
Why Mine Data?

Huge amounts of data being collected and

Walmart records 20 millions per day
health care transactions: multi-gigabyte databases
Mobil Oil: geological data of over 100 terabytes
Affordable computing
Competitive pressure
gain an edge by providing improved, customized services
information as a product in its own right
Knowledge discovery in databases (KDD) is the
process of identifying valid, potentially useful and
ultimately understandable patterns in data

Clean, Data Training Data

Collect, Data Data Mining
Summarize Warehouse

Verification, Model
Operational Evaluation Patterns
Data mining algorithm components
Model representation
descriptions of discovered patterns
overly limited representation -- unable to capture data patterns
too powerful -- potential for overfit
(decision trees, rules, linear/non-linear regression & classification,
nearest neighbor and case-based reasoning methods, graphical
dependency models)
Model evaluation criteria
how well a pattern (model) meets goals (fit function)
eg., accuracy, novelty, etc.
Search method
parameter search: optimization of of parameters for a given model
model search: considers a family of models
Different methods suit different problems. Proper
problem formulation crucial.
Data mining involves fitting models to and determining
patterns from observed data.
Knowledge Discovery Process
understanding the application domain, and goals of KDD effort
Data selection, acquisition, integration
Data cleaning
noise, missing data, outliers,etc.
Exploratory data analysis
dimensionality reduction, transformations
selection of appropriate model for analysis, hypotheses to test
Data mining
selecting appropriate method that match set goals (classification,
regression, clustering, etc)
selecting algorithm
Testing and verification
Consolidation and use
Issues and challenges
large data
number of variables (features), number of cases (examples)
multi gigabyte, terabyte databases
efficient algorithms, parallel processing
high dimensionality
large number of features: exponential increase in search space
potential for spurious patterns
dimensionality reduction
models noise in training data, rather than just the general patterns
Changing data, missing and noisy data
Use of domain knowledge
utilizing knowledge on complex data relationships, known facts
Understandability of patterns
Data Mining
Prediction Methods
using some variables to predict unknown or future values of
other variables

Descriptive Methods
finding human-interpretable patterns describing the data
Data Mining Tasks

Association Rule Discovery
Sequential Pattern Discovery
Deviation Detection
Data defined in terms of attributes, one of which is the class

Find a model for class attribute as a function of the

values of other(predictor) attributes, such that previously
unseen records can be assigned a class as accurately
as possible.

Training Data: used to build the model

Test data: used to validate the model (determine accuracy of the
Given data is usually divided into training and test sets.
Classification: Direct Marketing
Goal: Reduce cost of soliciting (mailing) by targeting
a set of consumers likely to buy a new product.
for similar product introduced earlier
we know which customers decided to buy and which did
not {buy, not buy} class attribute
collect various demographic, lifestyle, and company
related information about all such customers - as possible
predictor variables.
Learn classifier model
Classification: Fraud detection
Goal: Predict fraudulent cases in credit card
Use credit card transactions and information on its account-
holder as input variables
label past transactions as fraud or fair.
Learn a model for the class of transactions
Use the model to detect fraud by observing credit
card transactions on a given account.

Given a set of data points, each having a set of

attributes, and a similarity measure among them,
find clusters such that
data points in one cluster are more similar to one another
data points in separate clusters are less simislar to one
Similarity measures
Euclidean distance if attributes are continuous
Problem specific measures
Clustering: Market Segmentation

Goal: subdivide a market into distinct subsets of

customers where any subset may conceivably be
selected as a market target to be reached with a
distinct marketing mix.
collect different attributes on customers based on
geographical, and lifestyle related information
identify clusters of similar customers
measure the clustering quality by observing buying patterns
of customers in same cluster vs. those from different clusters.
Association Rule Discovery
Given a set of records, each of which contain
some number of items from a given collection
produce dependency rules which will predict occurrence of
an item based on occurences of other items
Association Rules:Application

Marketing and Sales Promotion:

Consider discovered rule:
{Bagels, } --> {Potato Chips}
Potato Chips as consequent: can be used to determine
what may be done to boost sales
Bagels as an antecedent: can be used to see which
products may be affected if bagels are discontinued
Can be used to see which products should be sold with
Bagels to promote sale of Potato Chips
Association Rules: Application
Supermarket shelf management
Goal: to identify items which are bought together
(by sufficiently many customers)
Approach: process point-of-sale data (collected
with barcode scanners) to find dependencies
among items.
If a customer buys Diapers and Milk, then he is very likely to
but Beer
so stack six-packs next to diapers?
Sequential Pattern Discovery
Given: set of objects, each associated with its
own timeline of events, find rules that predict
strong sequential dependencies among different
events, of the form (A B) (C) (D E) --> (F)

xg :max allowed time between consecutive

ng: min required time between consecutive
event sets
ws: window-size, max time difference between
earliest and latest events in an event-set (events
within an event-set may occur in any order)
ms: max allowed time between earliest and
latest events of the sequence.
Sequential Pattern Discovery:
sequences in which customers purchase goods/services
understanding long term customer behavior -- timely

In point-of--sale transaction sequences

Computer bookstore:
(Intro to Visual C++) (C++ Primer) --> (Perl for Dummies,
Athletic Apparel Store:
(Shoes) (Racket, Racketball) --> (Sports Jacket)
Predict a value of a given continuous valued
variable (dependent variable) based on values of
other variables (independent variables)
Statistics, Neural networks, Genetic algorithms
predicting sales volumes of new product based on
advertising expenditure
Time series prediction of stock market indices.
complement to other DM techniques like
Sample Data Mining Plan: Example
Bank concerned about attrition for its Demand Deposit Accounts
identify customers likely to leave, with sufficient warning of impending
attrition to allow for some intervention (signature for impending
Hypothesis testing
transaction data may be insufficient
explore ideas about why customers might leave, and how to identify
e.g. Regular bi-weekly direct deposit ceases: new job and no longer using
direct deposits
got married and spouse used another bank: reduction in balance and
number if transactions, last-name change request
Data requirements
Careful attention to data generated by internal decisions:
bank started charging for debit card transactions that were free
bank turned down loan or credit increase request
Is the data available?
Preparing data for analysis
Exploratory analysis of data
queries, OLAP, hypothesis testing
association rules
Knowledge Discovery plan
classes of customers rather than an overall signature of attrition?
Deviation from normal behavior indicating attrition potential
Preparing data for analysis
data organized over time-windows
demographic profiles
models for different clusters
Example:improving direct mail
Direct mailing for home equity line of credit (HELOC)
prospects are existing demand deposit account (DDA) customers
use info. on lifetime value of existing customers to derive model to
predict customers likely to be the most profitable long-term
~ 40K cases

(~250K cases)
DDA history of loan balances over 3,6,9,12,18 months,
returned checks
demographic data (age, income, length of residence, etc.),
both internal and external
property data sourced externally (home purchase price,
loan-to-value ratio, etc.)
credit worthiness data
response to previous mailings
120 variables selected
less than half the DDAs had history records; missing fields;
(45 K cases remaining for use -- prospects database)
exclude variables like sex, race, age (legal restrictions)
Neural network (radial basis function) model for
value prediction
Training data
randomly sample from prospects database; weighted to
include more responders than present in actual data
rank on likelihood of response
consider top and bottom 10% -- use visualization, decision
tree to understand rationale for obtained classification
sample from prospects database; unweighted with normal
proportion of responders and non-responders
gains (lift) chart
Example: Lift analysis

Number Number Decile Cum Cum

Decile of of Response Response Response
Customers Responses Rate Rate Lift
top 4,617 865 18.7% 18.7% 411
2 4,617 382 8.3% 13.5% 296
3 4,617 290 6.3% 11.1% 244
4 4,617 128 2.8% 9.0% 198
5 4,617 97 2.1% 7.6% 167
6 4,617 81 1.8% 6.7% 146
7 4,617 79 1.7% 5.9% 130
8 4,617 72 1.6% 5.4% 118
9 4,617 67 1.5% 5.0% 109
bottom 4,617 43 0.9% 4.6% 100
TOTAL 46,170 2,104 4.6%