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What is Data Mining?

Need to know what is data mining and want some practical suggestions to reduce information management costs?

What is a data mine?

It's not someplace where Captain Picard sends Data with a pickaxe.What is Data Mining

Data mining involves looking for patterns of data and making decisions based on patterns or dependencies.

Frequently, these decisions are marketing related but may also involve security, fraud and, depending upon the organization, core business decisions such as risk severity management.

What does all this mean?

Suppose that a large hotel chain is analyzing sales data across all chains and notices that room service charges "Spike" on Monday nights.

That is an interesting fact by itself but further analysis highlights other patterns e.g.
  • The room service charges are for sundry items such as potato chips, dip and other snacks;
  • The quantity ordered seems high for one person;
  • Soft drinks or other beverages seem to always be included;
  • There are several room service charges to the same room on the same night;
  • Sometimes the food is charged to a different room, than where the  order was delivered, and to a different guest; and
  • Lounge revenues seem to drop on Monday nights.
These patterns may lead hotel management to look at how policies may be impacting revenue e.g.
  • They may determine that several people are gathering in one room and making room charges;
  • They may discover that lounge televisions are tuned to news channels with no volume;
  • They may remember that Monday night is football night;
  • They may conclude that having  "Monday Night" football specials in the lounge might be a good way to attract more business to the higher profit lounge area than room service; and
  • They may decide to try a change of policy and monitor results.
Hotel management business intelligence analysts who know the answer to what is data mining can exploit data patterns in a variety of ways to help make marketing decisions.

What is data mining for credit risk?

A credit card company may analyze transactions for severely delinquent cardholders and notice patterns of use e.g. in the six months prior to delinquency, cardholders may typically
  • Make charges at liquor outlets;
  • Use the card to make food purchases;
  • Pay the minimum balance;
  • Use one card to pay the minimum balance on a second card; or
  • Use the card to make purchases at establishments that are not consistent with prior use.
Credit risk management might analyze these patterns and discover that a very high proportion of delinquent or card holder "write-offs" fall into a similar pattern prior to becoming a major issue. They may decide to change risk policy e.g.
  • Cardholders who miss one, or two monthly payments might normally receive a request for prompt payment after the second month; and
  • Risk management may decide that cardholders who start to fall into the patterns identified above should receive an immediate telephone call to review credit status; or
  • They may decide to reduce cardholder credit limits.
What is data mining for fraud?

Credit card companies sometimes use data mining services to analyze patterns of cardholder usage. These patterns are used to establish fraud tolerance thresholds e.g. a credit card that is always used by the cardholder to make small retail purchases or restaurant purchases is suddenly used to make on-line purchases of substantial value. This may be a trigger for the credit card fraud department to temporarily suspend the card and contact the cardholder to ensure that the charges are legitimate.

The discovery of good patterns and potentially bad patterns is part of business intelligence data mining.

What is data mining for crime prevention?

The USA Patriot Act, enacted in October 2001 provides the regulatory guidance for many data mining activities such as anti-money laundering.

Banks are required to examine all customer transactions and report suspicious behavior. They may accomplish this by using a sophisticated data mining application such as FORTENT. This risk and compliance application is used to analyze all customer transactions such a credit card transactions, direct deposits, wire transfers,  and other monetary transactions. Transactions that fall within certain pre-defined patterns are flagged and a suspicious activity report is created.

Summary...


Data mining involves looking for patterns of data and making decisions based on patterns or dependencies.

Frequently, these decisions are marketing related but may also involve security, fraud and, depending upon the organization, core business decisions such as risk severity management.

A successful information management discipline requires business intelligence analysts who understand what is data mining.


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