Predicting The Future

"DISCLAIMER: Past results may not reflect future performance"

How many times have you read that? The truth is that past behavior is highly predictive of future performance, at least in a statistical manner. The science (and art) of predictive analytics is all about using past data to better predict the future... and it works amazingly well.

There are some great examples at play today. One of my favorites is credit card fraud detection. Most banks today have such systems. Every time you make a transaction, the system compares that transaction to your past behavior as well as to known fraudulent patterns. In a fraction of a second, these predictive analytic systems compute the probability that your card has been stolen. Transactions that exceed certain risk thresholds are immediately flagged, and a bank employee will call you to check to see if everything is okay. These systems have stopped over half of all credit card fraud, often within the first few transactions. Because these systems work in real time, they have even aided in the apprehension of thieves at the checkout!

I have had the pleasure of working on the analytic engines within these systems. The pattern detection algorithms are extremely interesting, but they must remain secret. However, I can tell one interesting story. Humans are terrible at making up numbers. So when a fraudster tries to create a "seemingly random" dollar amount, there are certain psychological behaviors that make some digit probabilities more likely than others. And using truly random numbers also doesn't work because legitimate business transactions do not follow true randomness either. This fact alone can be used to help predict whether a transaction is fraudulent or not. In modern fraud predictive analytics, there are literally thousands of such statistical qualities that are used in the models.

Predictive analytics are used in myriad areas of commerce. Every checking account you have can result in up to a dozen or so predictive models run every month. They test for everything from your profit potential for the bank to likelihood of going into bankruptcy, from likelihood of leaving for another bank, to likelihood of accepting an offer of overdraft protection. Every time you swipe your credit card when you checkout, between the time you swipe the card and the "Approved" response (which is usually 2 second or less), a couple of companies thousands of miles away run predictive analytics to make sure you are the card holder, and if you are near your credit limit, is it worth approving you beyond it, and even is this merchant who they say they are.

Online auction sites and online payment companies use similar fraud and risk predictive analytics on every transaction. You will be surprised to learn that most of what we call "junk" mail is actually run through predictive models. Marketing is tough, because response rates are always so low, but if predictive analytics can distill responders from 0.25% to 1.0% the profitability of that campaign just went up by a factor of four! Not to mention, that is a lot of trees saved.

Predictive analytics are used everywhere in our lives. Every time you visit the doctor, paperwork gets filed on which tests you did and which drugs were prescribed. A number of different predictive analytics are run to see if the doctor is over-billing, and even if the doctor's billing address is correct.

Next time you buy groceries, turn over your receipt and look at the coupons printed on the back. These were selected for you, in part by a predictive analytic system. If you shop at major retailers like Walmart, Target, Best Buy and so on, you will notice that they almost have everything in stock. Their supply chain management systems are packed full over predictive analytics that monitor sales data, social trends, weather, product lifecycles and many other factors to predict exactly how much of each product to send to each store. See a new CVS, McDonalds or Starbucks opening near you? Predictive analytics were used to asses the viability of that site for that business.

So how does these ever-present predictive analytics work? That is what I will cover next post. However, I will say that predictive analytics are still very new in online marketing, which is why I am very excited about where Inuvo is heading. More on that later!