What are 'Predictive Analytics'

Predictive analytics describe 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 policyholders, 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.

Common Misconceptions of Predictive Analytics

A common misconception is that predictive analytics and machine learning are the same things. At its core, predictive analytics includes a series of statistical techniques (including machine learning, predictive modeling and data mining) and uses statistics (both historical and current) to estimate, or ‘predict,’ future outcomes. Predictive analytics help us to understand possible future occurrences by analyzing the past. Whereas machine learning, on the other hand, is a subfield of computer science that, as per the 1959 definition by Arthur Samuel -- an American pioneer in the field of computer gaming and artificial intelligence which gives ‘computers the ability to learn without being explicitly programmed.’

The most common predictive models include decision trees, regressions (linear and logistic) and neural networks — which is the emerging field of deep learning methods and technologies.

RELATED TERMS
  1. Data Analytics

    Data analytics is the science of drawing insights from raw information ...
  2. Prescriptive Analytics

    Prescriptive analytics is the use of technology to help businesses ...
  3. Prediction Market

    A prediction market is a collection of people speculating on ...
  4. Data Science

    Data science is a field of Big Data that seeks to provide meaningful ...
  5. Moody's Analytics

    Moody’s Analytics offers tools, solutions and best practices ...
  6. Forecasting

    The use of historic data to determine the direction of future ...
Related Articles
  1. Tech

    Predictive Analytics Drives Return for Investors

    A new industry of predictive analysis has developed to make sense of big data and give investors real-time buy and sell recommendations based on the patterns forming in the data long before traditional ...
  2. Tech

    3 Surprising Things That Big Data Reveals About HR

    More and more companies are using big data in HR as a means of saving time and money when recruiting, hiring and retaining workers.
  3. Investing

    Style Matters In Financial Modeling

    If you're looking to get a job as an analyst, you'll need to know how to work it.
  4. Tech

    How Big Data Has Changed Insurance

    No longer confined to technology, big data has become integral to providing solutions to the insurance industry's long standing challenges.
  5. Tech

    The Big Play In Big Data

    Given just how technology oriented our lives are becoming, the amount of data we are creating is staggering. But in that staggering amount of zeros and ones, there are opportunities for investors. ...
  6. Financial Advisor

    Why Financial Advisors Need to Use Google Analytics

    Google Analytics is a free tool that advisors can use to monitoring website traffic and improving digital marketing efforts. Here's what to know.
  7. Tech

    7 Ways Amazon Uses Big Data to Stalk You

    Using predictive analytics, Amazon anticipates what you are likely to buy, when, and has it boxed and waiting in its nearby distribution center to ship out to you - practically before even you ...
  8. Tech

    Kensho

    Kensho combines natural language search, graphical user interfaces, and cloud computing to take data analytics to a new level.
RELATED FAQS
  1. What is the most important type of data used in business analytics?

    Consider what makes data useful in business analytics, and why companies should search for the types of data that provide ... Read Answer >>
  2. What are some examples of ways that sensitivity analysis can be used?

    Understand the concept of sensitivity analysis and learn about the wide variety of disciplines to which it can be applied. Read Answer >>
  3. What Does It Mean When There Is 'Price Action'?

    Price action refers to the day-to-day fluctuation in the price of an asset. Read Answer >>
Hot Definitions
  1. Quick Ratio

    The quick ratio measures a company’s ability to meet its short-term obligations with its most liquid assets.
  2. Leverage

    Leverage results from using borrowed capital as a source of funding when investing to expand the firm's asset base and generate ...
  3. Financial Risk

    Financial risk is the possibility that shareholders will lose money when investing in a company if its cash flow fails to ...
  4. Enterprise Value (EV)

    Enterprise Value (EV) is a measure of a company's total value, often used as a more comprehensive alternative to equity market ...
  5. Relative Strength Index - RSI

    Relative Strength Indicator (RSI) is a technical momentum indicator that compares the magnitude of recent gains to recent ...
  6. Dividend

    A dividend is a distribution of a portion of a company's earnings, decided by the board of directors, to a class of its shareholders.
Trading Center