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. Prescriptive Analytics

    Prescriptive analytics is the use of technology to help businesses ...
  2. Machine Learning

    Machine learning is the idea that a computer program can adapt ...
  3. Forecasting

    Forecasting is a technique that uses historical data as inputs ...
  4. Deep Learning

    Deep Learning is an artificial intelligence function that enables ...
  5. Dean Analytic Schedule

    The Dean Analytic Schedule is a method of rating fire insurance ...
  6. Multiple Linear Regression - MLR

    Multiple linear regression (MLR) is a statistical technique that ...
Related Articles
  1. Tech

    Cisco Bets Big on Data Center Analytics

    Cisco's (NASDAQ: CSCO) fiscal third-quarter earnings release was a testament to the direction new-ish CEO Chuck Robbins is taking the former king of network connectivity. The company's focus ...
  2. 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.
  3. Small Business

    Calculating (Small) Company Credit Risk

    Determining creditworthiness of smaller and medium-sized corporations isn't as easy as for larger companies, but these tips can help.
  4. Investing

    Google: AI Beats Hospitals at Patient Predictions

    Google claims that its artificial intelligence can better assess risks regarding patient outcomes.
  5. Tech

    How Big Data Has Changed Finance

    The vast proliferation of data and increasing technological complexities continues to transform the way industries operate and compete.
  6. Trading

    Technical Analysis Works In Forex Markets

    Technical analysis is a hotly debated topic. Discover evidence showing that it works in forex markets.
  7. Tech

    How Big Data Has Changed Marketing

    Big data has enabled marketers to enhance their customer engagement and customer retention strategies by providing insight into behavior and thoughts.
  8. Tech

    Kensho

    Kensho combines natural language search, graphical user interfaces, and cloud computing to take data analytics to a new level.
  9. Financial Advisor

    Why Blogging Is Such an Important Tool for Advisors

    Here's how marketing techniques like blogging can help advisors grow assets under management.
RELATED FAQS
  1. What is the difference between financial forecasting and financial modeling?

    Understand the difference between financial forecasting and financial modeling, and learn why a company should conduct both ... Read Answer >>
  2. What is the difference between financial forecasting and financial modeling?

    Understand the difference between financial forecasting and financial modeling, and learn why a company should conduct both ... Read Answer >>
  3. 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 >>
  4. What are some of the limitations and drawbacks of economics as a field?

    Find out why the field of economics is full of controversy. Policy decisions, political campaigns and personal finances are ... Read Answer >>
  5. Where can I find historical stock/index quotes?

    Finding historical quotes on stocks and indices online has never been easier. Use Investopedia's historical data tool for ... Read Answer >>
Trading Center