Join Wayne Winston for an in-depth discussion in this video On prescriptive analytics, part of Wayne Winston on Analytics.
While prescriptive analytics simply means, can we use data in analytics to prescribe a course of action for a gir organization that will help that organization? So let's look at some examples. Okay, you go walk into your Whole Foods, or you walk into your Kroger's or your supermarket and there's a price for every product in that supermarket. How did those prices come about? The really smart grocery stores will use prescriptive analytics to determine the price of the product. In other words maybe if they raise the price of Cheerios a nickel, they will make more money. If they cut the price of Cheerios nickel, maybe they will make more money.
But, this is a vital importance to a super market that runs on 1% profit margins. And so there are a lot of pricing consultancies that use analytics to recommend optimal pricing. Another example we talked about retirement planning earlier. So can we prescribe based on your age and your risk tolerance. How should you allocate your assets among, let's say, bonds, treasury bills and US stocks in foreign stocks. To do, to obtain a desired level of expected return at minimum risk. Some of you may be involved in marketing and so you would want to know how to allocate the marketing budget to maximize the profit from your product.
Should I put more money into national advertising? Should I put more money into local advertising? Should I simply just cut the price? Should I put coupons in the paper? There are many questions and we have a limited budget. How can we get the best results where we're marketing budget? A lot of you are sports fans. So basically, if you're a baseball fan, then i'm a Cubs fan, which is a thankless cause. So basically, who should the Cubs sign in free agency this year. Who should the New York Knicks, who should the Lakers sign. Should the Lakers resign Dwight Howard in the summer of 2013? Or should they trade him to the Clippers? You want to have data factor into that as one of the decision making points.
In other words, do you think Dwight Howard is worth what he is going to be paid given the future productivity he's going to create. Maybe the worst decision in sports history was giving A Rod that 10 year contract. And we could go on and on about that but I think the Yankees would they had to all over would really have redone that contract. So what about pharmaceutical industry? What's another example prescriptive analytics? So you're producing a drug. Eli Lilly, I'm from Indiana. And so, Eli Lilly, of course, is the biggest drug company in Indiana. You probably know them as the creators of Prozac. So basically for every drug they want to know what factors optimize the ye, yield from production.
So some factors are the pressure, the size of the container and basically the temperature. So what combination of those three factors will optimize the yield. One extra percentage point in yield could mean $100,000 on a drug. So analytics is often applied to optimize the yield from the production process. Finally let's talk about treating cancer. So every type of cancer is different. So you certainly want to prescribe the treatment given the type of cancer in which you know about the patient. That will given cost constraints provide the best outcome.
And I think there's a lot of cases in medicine where we finding the treatments that are most expensive don't provide a better outcome. Then the ones are, that are less expensive. And I think in the future we're going to see that impact, the type of treatment we get for certain diseases.
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