Where to Begin with Predictive Analytics and Black Swan Events

James Taylor has written an excellent and informative article for Information Management Where to Begin with Predictive Analytics it is recommended reading for executives considering how to most prudently begin deploying predictive analytics, but struggling to determine a clear starting point.

I couldn't agree more with all the points he makes. It also makes me think of a conversation I had yesterday about the flip side of this:  Black Swan events - events that are extremely rare, but when they happen completely destroy the performance of any predictive model you have made.

The point James makes about focussing on transactional versus strategic decisions in my view minimizes the Black Swan concern, which is a natural concern for many people when looking at predictive analytics critically (or indeed any endeavour where one makes future decisions based upon past behaviour).

Micro-decisions made on the basis of thousands to millions of historical examples are likely to contain quiet a few black swan events within them (often known as outliers) but they are diluted by the massive number of 'normal' transactions. Further the magnitude of investment in each micro-decison (recommended by the model) is relatively trivial, so you are not relying on each prediction being perfect, rather a statistically significant number being good enough to give you better performance than random.

Accordingly, the Black Swan effect does not become a major element of risk - whereas it certainly can be when making a single high magnitude decision (e.g. how high to place the back-up generator at a nuclear reactor in Fukushima, based upon historical high water marks or whether it would have been safe to make a bet two years ago that there would be no earthquakes in Christchurch, New Zealand).

No doubt someone will be able to point out examples where a black swan event can affect micro-decisions too (and please feel free to), however the point remains that generally you are on significantly more solid ground with transactional micro-decisions than major strategic ones.