DEFINITION of 'Predictive Analytics'
The use of statistics and modeling to determine future performance based on current and historical data. Predictive analytics look at patterns in data to determine if those patterns are likely to emerge again, which allows businesses and investors to adjust where they use their resources in order to take advantage of possible future events.
BREAKING DOWN 'Predictive Analytics'
There are several types of predictive analytics methods available. Predictive models look at past data to determine the likelihood of certain future outcomes, while descriptive models look at past data to determine how a group may respond to a set of variables.
Predictive analytics is a decision making tool in a variety of industries. For example, insurance companies examine policy applicants to determine the likelihood of having to pay out for a future claim based on the current risk pool of similar policy holders, as well as past events that have resulted in payouts. Marketers look at how consumers have reacted to the overall economy when planning on a new campaign, and can use shifts in demographics to determine if the current mix of products will entice consumers to make a purchase.
Active traders look at a variety of metrics based on past events when deciding whether to buy or sell a security. Moving averages, bands and break points are based on historical data, and are used to forecast future price movements.