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Summary Machine Learning for business

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Machine learning
BUSINESS ENGINEERING – FINANCIAL
ENGINEERING
2024-2025




Data Science Challenge: 5
Exam: 15
- Multiple choice
➢ No guessing correction
➢ Censure: if 5 answers per question, you need to answer 60% correct to pass the multiple
choice part
➢ So answer all questions
➢ Details on the exam
- Open question

,Inhoudsopgave
LECTURE 1 – WHAT IS DATA SCIENCE AND MACHINE LEARNING? ....................................................................... 4
1 INTRODUCTION ............................................................................................................................................................................. 4
2 TERMINOLOGY.............................................................................................................................................................................. 4
2.1 Artificial Intelligence ........................................................................................................................................................... 5
2.2 Machine Learning ............................................................................................................................................................... 5
3 DATA SCIENTIST ........................................................................................................................................................................... 7
3.1 Importance ........................................................................................................................................................................... 7
3.2 Roles and skills .................................................................................................................................................................... 7
LECTURE 2 – MACHINE LEARNING .......................................................................................................................... 8
1 EXPLAINING VERSUS PREDICTING MODELLING ............................................................................................................................... 8
2 DATA PREPROCESSING ................................................................................................................................................................. 10
2.1 Sampling .............................................................................................................................................................................. 10
2.2 Encoding .............................................................................................................................................................................. 11
2.3 Missing values .................................................................................................................................................................... 12
2.4 Outliers ............................................................................................................................................................................... 12
2.5 Normalizing ........................................................................................................................................................................ 13
2.6 Discretization .................................................................................................................................................................... 14
3 SOME NOTES ABOUT CHATGPT ................................................................................................................................................... 14
LECTURE 3 – INTRODUCTION TO PREDICTIVE MODELING ............................................................................... 16
1. TERMINOLOGY ............................................................................................................................................................................ 16
2. FINDING INFORMATIVE VARIABLES FROM THE DATA ................................................................................................................... 17
3. DECISION TREES.......................................................................................................................................................................... 17
4. METHOLOGY OF DECISION TREES IN MORE DETAIL ..................................................................................................................... 18
5. OVERFITTING AND ITS AVOIDANCE ........................................................................................................................................... 20
5.1 Overfitting .......................................................................................................................................................................... 20
5.2 Avoidance ........................................................................................................................................................................... 21
5.3 Bias/ variance trade-off .....................................................................................................................................................22
LECTURE 4 – ASSESSING AND VISUALIZING MODEL PERFORMANCE ................................................................ 23
1. EVALUATING CLASSIFIERS ............................................................................................................................................................23
1.1 Accuracy .............................................................................................................................................................................. 23
1.2 Confusion matrix ................................................................................................................................................................ 23
1.3 Problems: unbalanced classes ............................................................................................................................................ 23
1.4 Problems: unequal costs and benefits .............................................................................................................................. 24
2. EXPECTED VALUE ....................................................................................................................................................................... 24
2.1 Expected Value for classifier evaluation .......................................................................................................................... 24
3. EVALUATION AND BASELINE PERFORMANCE .............................................................................................................................. 26
LECTURE 5 - LEVERAGING DATA SCIENCE: BUSINESS INSIGHTS, MODEL PERFORMANCE, AND EVIDENCE-
BASED DECISION MAKING .................................................................................................................................... 28
1 DECISION ANALYTIC THINKING I: WHAT IS A GOOD MODEL? (RECAP) ...................................................................................... 28
1.1 What is a Good Model? ...................................................................................................................................................... 28
1.2 Key concepts ...................................................................................................................................................................... 28
1.2.1 Positive and negatives ..................................................................................................................................................... 28
1.2.2 Accuracy .......................................................................................................................................................................... 28
1.2.3 The confusion matrix...................................................................................................................................................... 29
1.2.4 Cost- Benefit matrix ....................................................................................................................................................... 29
1.2.5 Expected Profit/ Value .................................................................................................................................................... 29
1.2.6 What is a good baseline?................................................................................................................................................ 29
2 VISUALIZING MODEL PERFORMANCE ........................................................................................................................................... 29
2.1 Ranking Classifier .............................................................................................................................................................. 30
2.2 Profit Curve........................................................................................................................................................................ 30

PAGINA 1

, 2.3 ROC Curve ......................................................................................................................................................................... 30
2.4 AUC (Area Under Curve)................................................................................................................................................... 31
2.5 Lift Curve (Cumulative Response Curve) ......................................................................................................................... 31
3 EVIDENCE AND PROBABILITIES.................................................................................................................................................... 34
3.1 Evidence .............................................................................................................................................................................. 34
3.2 Joint Probabilities and Independence............................................................................................................................... 34
3.3 Bayes Rule .......................................................................................................................................................................... 34
3.4 Naive Bayes and Conditional Independence ................................................................................................................... 34
3.5 Evidence Lift .......................................................................................................................................................................35
LECTURE 6 – SIMILARITY, NEIGHBORS, AND CLUSTERS .................................................................................... 37
1. SIMILARITY (BETWEEN INSTANCES) .............................................................................................................................................37
2. DISTANCE AND SIMILARITY MEASURES .......................................................................................................................................37
2.1 Euclidean distance ..............................................................................................................................................................37
2.2 Manhattan distance ...........................................................................................................................................................37
2.3 Cosine similarity ................................................................................................................................................................37
2.4 Jaccard similarity .............................................................................................................................................................. 38
2.5 Hamming distance ............................................................................................................................................................ 38
2.6 Levenshtein distance ........................................................................................................................................................ 38
3. K-NEAREST NEIGHBORS ............................................................................................................................................................. 38
4. HIERARCHICAL CLUSTERING (DENDROGRAMS) ......................................................................................................................... 40
5. K-MEANS CLUSTERING .............................................................................................................................................................. 40
LECTURE 7 – RECOMMENDER SYSTEMS ............................................................................................................... 41
1. WHAT IS A RECOMMENDER SYSTEM? ........................................................................................................................................... 41
2. PROBLEM DEFINITION: EVALUATING A RECOMMENDATION ALGORITHM .................................................................................. 41
3. RECOMMENDATION ALGORITHMS: TWO PERSPECTIVES ........................................................................................................... 42
3.1 Baselines, Content-Based, Collaborative Filtering and Hybrid Algorithms (Data perspective) .............................. 42
3.1.1 Baseline ............................................................................................................................................................................ 42
3.1.2 Content-based ................................................................................................................................................................. 42
3.1.3 Collaborative filtering ..................................................................................................................................................... 43
3.2 Pointwise, Pairwise and Listwise Learning-to-Rank (Learning perspective) ............................................................ 44
3.2.1 Pointwise: learning-to-rank ........................................................................................................................................... 44
3.2.2 Pairwise: learning-to-rank ............................................................................................................................................. 44
3.2.3 Listwise: learning-to-rank.............................................................................................................................................. 44
4. UNDER THE HOOD: BUILDING A PERSONALIZED RECOMMENDER SYSTEM ................................................................................ 44
LECTURE 8 – TEXT MINING .................................................................................................................................... 45
1. TEXT MINING APPLICATIONS ..................................................................................................................................................... 45
1.1 Unstructured vs. Structured Data ..................................................................................................................................... 45
1.2 Text Preprocessing............................................................................................................................................................. 45
1.3 Terminology: Documents, Tokens and Terms, Corpus ................................................................................................... 46
1.4 Bag of Words ..................................................................................................................................................................... 46
1.5 TF-IDF (Term Frequency - Inverse Document Frequency) ............................................................................................. 47
1.6 N-gram ............................................................................................................................................................................... 48
1.7 Named Entity Recognition ................................................................................................................................................ 48
1.8 Topic Model ....................................................................................................................................................................... 48
1.9 Word Embedding ............................................................................................................................................................... 49
2. ASSOCIATION RULE MINING...................................................................................................................................................... 49
2.1 Item sets ............................................................................................................................................................................. 49
2.2 Frequent Item sets............................................................................................................................................................. 49
2.3 Association Rules .............................................................................................................................................................. 50
2.4 Support .............................................................................................................................................................................. 50
2.5 Confidence ......................................................................................................................................................................... 50
2.6 Association Rule Mining: Apriori Algorithm .................................................................................................................. 50
2.7 Lift .......................................................................................................................................................................................52

PAGINA 2

,LECTURE 9 – NEURAL NETWORKS AND DEEP LEARNING ................................................................................... 53
1. NEURAL NETWORKS....................................................................................................................................................................53
1.1 The Perceptron ....................................................................................................................................................................53
1.2 Activation Function ............................................................................................................................................................53
1.3 Multi-Layer Perceptron ..................................................................................................................................................... 54
1.4 Forward Pass .......................................................................................................................................................................55
1.5 Loss Function ..................................................................................................................................................................... 56
1.6 Backpropagation (Backward Pass) .................................................................................................................................. 56
1.7 Gradient Descent Algorithm ............................................................................................................................................. 56
1.8 Stochastic Gradient Descent ............................................................................................................................................ 56
2. DEEP LEARNING......................................................................................................................................................................... 57
2.1 Convolutional Neural Networks (CNNs) ..........................................................................................................................57
2.2 Recurrent Neural Networks (RNNs) ................................................................................................................................ 58
2.3 Autoencoders ..................................................................................................................................................................... 58
2.4 Transformers ..................................................................................................................................................................... 59
2.5 Foundation Models (Large Language Models) ............................................................................................................... 59
LECTURE 10 – ENSEMBLE METHODS SVM ............................................................................................................. 61
1. ENSEMBLE METHODS ................................................................................................................................................................... 61
1.1 Combine by consensus ........................................................................................................................................................ 61
1.1.1 Bagging .............................................................................................................................................................................. 61
1.1.2 Random Forests ............................................................................................................................................................... 62
1.2 Combine by learning .......................................................................................................................................................... 62
1.2.1 Boosting ........................................................................................................................................................................... 62
1.2.2 Stacking ........................................................................................................................................................................... 63
2. A BRIEF INTRO TO THE SUPPORT VECTOR MACHINE ................................................................................................................. 64
3. DATA SCIENCE ETHICS ............................................................................................................................................................... 66
3.1 Data gathering: Privacy, A/B Testing and Bias ............................................................................................................... 67
3.1.1 Privacy .............................................................................................................................................................................. 67
3.1.2 Experimentation ............................................................................................................................................................. 67
3.1.3 Bias................................................................................................................................................................................... 68
3.2 Data preprocessing: Proxies, Government Backdoors ................................................................................................... 68
3.3 Modeling: ZK Proofs, Discrimination .............................................................................................................................. 69
3.4 Model evaluation: explain ................................................................................................................................................ 69
3.5 Deployment: Unintended consequences .......................................................................................................................... 70




PAGINA 3

,Lecture 1 – What is Data Science and Machine Learning?
What is machine learning? The automatic extraction of patterns from large amounts of data (done by machines).
Most of what people call AI = machine learning


1 INTRODUCTION
What will be the goals of a data-driven prediction? To find non- obvious patterns
= we use the patterns to improve our business (ex. To offer more product so they won’t be sold out)

Machine learning: automatic extraction of knowledge from data
 Setting the scene with credit scoring example
o Banks: should I grand credit to this loan applicant?
o Predict the creditworthiness, based on historical data
 Data → Machine learning technique → pattern
BUT note: an initial set of data instances with known target variable needed otherwise we can’t make a
predicted model!




Data instance xi
- A vector of size m (number of input variables)
- I = 1, 2, … ,m (number of data instances)
-




2 TERMINOLOGY
Machine learning: automatic extraction of patterns from data
Data science: a set of fundamental principles that guide the extraction of
knowledge from data
AI: methods for improving the knowledge or performance of an intelligent agent
over time, in response to the agent's experience in the world
Big data: data that is so large that traditional data processing systems are unable
to deal with it (both storage and analysis component).
= only a few companies have this (ex. twitter)

Querying and reporting (=displaying the data)
- You know exactly what you are looking for – targeted data extraction
- SQL – structured query language
Querying and Visualization (= graphical representation of data)
- Multidimensional analysis – exploring data across multiple dimensions (attributes and factors) to
uncover relationships, patterns and trends



PAGINA 4

, OLAP – Online analytical processing = a technology and methodology used to perform multidimensional analysis of
large datasets quickly and interactively.
! The end-user is still the engine of discovery

Business intelligence – getting the right information to the right person at the right time
It always includes these points :
Data is collected in a data warehouse. Tries to get all the data in
one place
 Reporting uses data from the warehouse to generate visual
dashboards, tables, and summaries for business insights.
 Machine learning uses the data in the warehouse as input for
training predictive models and uncovering patterns.




2.1 Artificial Intelligence
• A computer interacts through data
• Learning from data leads to intelligence
• Big Data + Machine Learning = Artificial Intelligence (Theodoros Evgeniou, 2019)
• Renewed interest from Deep Learning (large artificial neural networks)
• Most work in AI is on Machine Learning
• The automatic extraction of patterns from large amounts of data”
 The separation between the fields has blurred

General definition: AI system leas a machine-based system that is designed to operate with varying levels of
autonomy and that may exhibit adaptiveness after deployment, and that, for explicit or implicit objectives, infers,
from the input it receives, how to generate outputs such as decisions, recommendations, predictions, classifications,
actions, or content creation (e.g., text, images, videos, or audio) to fulfill the intended purpose.
= The automatic extraction of patterns from large amounts of data


2.2 Machine Learning
Note: an initial set of data instances with known target variable
needed!!




Example Facebook likes predict personality traits
We can investigate the variables (likes) with highest and lowest
coefficient in the linear model.




Example. Default prediction with Facebook data for micro-finance
▪ In collaboration with NY-based LenddoEFL
▪ Mirco-finance in developing countries
▪ 1000 – 5000 $ loans
▪ Most citizens limited/no credit history

PAGINA 5

Table of contents

  1. 01 LECTURE 1 – WHAT IS DATA SCIENCE AND MACHINE LEARNING? 4
  2. 02 INTRODUCTION 4
  3. 03 TERMINOLOGY 4
    1. Artificial Intelligence 5
    2. Machine Learning 5
  4. 04 DATA SCIENTIST 7
    1. Importance 7
    2. Roles and skills 7
  5. 05 LECTURE 2 – MACHINE LEARNING 8
  6. 06 EXPLAINING VERSUS PREDICTING MODELLING 8
  7. 07 DATA PREPROCESSING 10
    1. Sampling 10
    2. Encoding 11
    3. Missing values 12
    4. Outliers 12
    5. Normalizing 13
    6. Discretization 14
  8. 08 SOME NOTES ABOUT CHATGPT 14
  9. 09 LECTURE 3 – INTRODUCTION TO PREDICTIVE MODELING 16
  10. 10 TERMINOLOGY 16
  11. 11 FINDING INFORMATIVE VARIABLES FROM THE DATA 17
  12. 12 DECISION TREES 17
  13. 13 METHOLOGY OF DECISION TREES IN MORE DETAIL 18
  14. 14 OVERFITTING AND ITS AVOIDANCE 20
    1. Overfitting 20
    2. Avoidance 21
    3. Bias/ variance trade-off 22
  15. 15 LECTURE 4 – ASSESSING AND VISUALIZING MODEL PERFORMANCE 23
  16. 16 EVALUATING CLASSIFIERS 23
    1. Accuracy 23
    2. Confusion matrix 23
    3. Problems: unbalanced classes 23
    4. Problems: unequal costs and benefits 24
  17. 17 EXPECTED VALUE 24
    1. Expected Value for classifier evaluation 24
  18. 18 EVALUATION AND BASELINE PERFORMANCE 26
  19. 19 BASED DECISION MAKING 28
  20. 20 DECISION ANALYTIC THINKING I: WHAT IS A GOOD MODEL? (RECAP) 28
    1. What is a Good Model? 28
    2. Key concepts 28
  21. 21 VISUALIZING MODEL PERFORMANCE 29
    1. Ranking Classifier 30
    2. Profit Curve 30
    3. ROC Curve 30
    4. AUC (Area Under Curve) 31
    5. Lift Curve (Cumulative Response Curve) 31
  22. 22 EVIDENCE AND PROBABILITIES 34
    1. Evidence 34
    2. Joint Probabilities and Independence 34
    3. Bayes Rule 34
    4. Naive Bayes and Conditional Independence 34
    5. Evidence Lift 35
  23. 23 LECTURE 6 – SIMILARITY, NEIGHBORS, AND CLUSTERS 37
  24. 24 SIMILARITY (BETWEEN INSTANCES) 37
  25. 25 DISTANCE AND SIMILARITY MEASURES 37
    1. Euclidean distance 37
    2. Manhattan distance 37
    3. Cosine similarity 37
    4. Jaccard similarity 38
    5. Hamming distance 38
    6. Levenshtein distance 38
  26. 26 K-NEAREST NEIGHBORS 38
  27. 27 HIERARCHICAL CLUSTERING (DENDROGRAMS) 40
  28. 28 K-MEANS CLUSTERING 40
  29. 29 LECTURE 7 – RECOMMENDER SYSTEMS 41
  30. 30 WHAT IS A RECOMMENDER SYSTEM? 41
  31. 31 PROBLEM DEFINITION: EVALUATING A RECOMMENDATION ALGORITHM 41
  32. 32 RECOMMENDATION ALGORITHMS: TWO PERSPECTIVES 42
    1. Baselines, Content-Based, Collaborative Filtering and Hybrid Algorithms (Data perspective) 42
    2. Pointwise, Pairwise and Listwise Learning-to-Rank (Learning perspective) 44
  33. 33 UNDER THE HOOD: BUILDING A PERSONALIZED RECOMMENDER SYSTEM 44
  34. 34 LECTURE 8 – TEXT MINING 45
  35. 35 TEXT MINING APPLICATIONS 45
    1. Unstructured vs. Structured Data 45
    2. Text Preprocessing 45
    3. Terminology: Documents, Tokens and Terms, Corpus 46
    4. Bag of Words 46
    5. TF-IDF (Term Frequency - Inverse Document Frequency) 47
    6. N-gram 48
    7. Named Entity Recognition 48
    8. Topic Model 48
    9. Word Embedding 49
  36. 36 ASSOCIATION RULE MINING 49
    1. Item sets 49
    2. Frequent Item sets 49
    3. Association Rules 50
    4. Support 50
    5. Confidence 50
    6. Association Rule Mining: Apriori Algorithm 50
    7. Lift 52
  37. 37 LECTURE 9 – NEURAL NETWORKS AND DEEP LEARNING 53
  38. 38 NEURAL NETWORKS 53
    1. The Perceptron 53
    2. Activation Function 53
    3. Multi-Layer Perceptron 54
    4. Forward Pass 55
    5. Loss Function 56
    6. Backpropagation (Backward Pass) 56
    7. Gradient Descent Algorithm 56
    8. Stochastic Gradient Descent 56
  39. 39 DEEP LEARNING 57
    1. Convolutional Neural Networks (CNNs) 57
    2. Recurrent Neural Networks (RNNs) 58
    3. Autoencoders 58
    4. Transformers 59
    5. Foundation Models (Large Language Models) 59
  40. 40 LECTURE 10 – ENSEMBLE METHODS SVM 61
  41. 41 ENSEMBLE METHODS 61
    1. Combine by consensus 61
    2. Combine by learning 62
  42. 42 A BRIEF INTRO TO THE SUPPORT VECTOR MACHINE 64
  43. 43 DATA SCIENCE ETHICS 66
    1. Data gathering: Privacy, A/B Testing and Bias 67
    2. Data preprocessing: Proxies, Government Backdoors 68
    3. Modeling: ZK Proofs, Discrimination 69
    4. Model evaluation: explain 69
    5. Deployment: Unintended consequences 70

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Foster Provost, Tom Fawcett Data Science for Business
Publisher: 2013 ISBN: 9781449374297 Edition: Unknown

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