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Siegel: 'Predictive Analytics'

Apr. 01, 2013 11:21 AM ET1 Comment
Brenda Jubin profile picture
Brenda Jubin

Predictive analytics intrudes on our lives every day. Amazon recommends products (sometimes, admittedly, bizarre -- I've received ads for headlights, guitars, and baby diapers), Stop & Shop sends targeted grocery coupons, and the same politician crafts different ads for Republicans and Democrats. Eric Siegel takes the reader into this powerful and potentially troubling world in Predictive Analytics: The Power to Predict Who Will Click, Buy, Lie, or Die (Wiley, 2013).

The glut of data is growing by "an estimated 2.5 quintillion bytes per day (that's a 1 with 18 zeroes after it). ... As data piles up, we have ourselves a genuine gold rush. But data isn't the gold. I repeat, data in its raw form is boring crud. The gold is what's discovered therein" (p. 26-27). Enter predictive analytics, "technology that learns from experience (data) to predict the future behavior of individuals in order to drive better decisions" (p. 37).

I'm going to look at a single use of predictive analytics, how it has been used in data-driven black box trading. For this purpose Siegel turned to John Elder, now head of the largest predictive analytics services firm in North America, who claims that "Wall Street is the hardest data mining problem" (p. 74). Early in his career, while still a graduate student at the University of Virginia, Elder reverse engineered a black-box trading system that claimed 70% accuracy with its predictions on whether the S&P 500 would go up or down the following day. It turned out that the so-called predictions "were based in part on a three-day average calculated across yesterday, today … and tomorrow. The scientists had probably intended to incorporate a three-day average leading up to today, but had inadvertently shifted the window by a day. Oops. … Any prediction it would generate today could not incorporate the very thing it was designed to foresee -- tomorrow's stock price" (p. 77).

This article was written by

Brenda Jubin profile picture
Brenda Jubin is an independent trader and investor with an academic and business background. She taught philosophy at Yale and was dean of Morse College, one of Yale's twelve undergraduate residential colleges. She then founded Brevis Press, a company specializing in academic press book production. Throughout she invested in stocks and mutual funds. She has now settled into the life of a full-time trader and investor. She also writes the blog Reading the Markets (http://www.readingthemarkets.blogspot.com).

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