Investigative Data Mining in Fraud Detection

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Information about Investigative Data Mining in Fraud Detection
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Published on February 6, 2008

Author: Dionigi

Source: authorstream.com

Investigative Data Mining in Fraud Detection:  Investigative Data Mining in Fraud Detection Overview (1):  Overview (1) Investigative Data Mining and Problems in Fraud Detection Definitions Technical and Practical Problems Existing Fraud Detection Methods Widely used methods The Crime Detection Method Comparisons with Minority Report Classifiers as Precogs Combining Output as Integration Mechanisms Cluster Detection as Analytical Machinery Visualisation Techniques as Visual Symbols Overview (2):  Overview (2) Implementing the Crime Detection System: Preparation Component Investigation objectives Collected data Preparation of collected data to achieve objectives Implementing the Crime Detection System: Action Component Which experiments generate best predictions? Which is the best insight? How can the new models and insights be deployed within an organisation? Contributions and Recommendations Significant research contributions Proposed solutions Literature and Acknowledgements:  Dick P K (1956) Minority Report, Orion Publishing Group, London, Great Britain. Abagnale F (2001) The Art of the Steal: How to Protect Yourself and Your Business from Fraud, Transworld Publishers, NSW, Australia. Mena J (2003) Investigative Data Mining for Security and Criminal Detection, Butterworth Heinemann, MA, USA. Elkan C (2001) Magical Thinking in Data Mining: Lessons From CoIL Challenge 2000, Department of Computer Science and Engineering, University of California, San Diego, USA. Prodromidis A (1999) Management of Intelligent Learning Agents in Distributed Data Mining Systems, Unpublished PhD thesis, Columbia University, USA. Berry M and Linoff G (2000) Mastering Data Mining: The Art and Science of Customer Relationship Management, John Wiley and Sons, New York, USA. Han J and Kamber M (2001) Data Mining: Concepts and Techniques, Morgan Kaufmann Publishers. Witten I and Frank E (1999) Data Mining: Practical Machine Learning Tools and Techniques with Java, Morgan Kauffman Publishers, CA, USA. Literature and Acknowledgements Investigative Data Mining and Problems in Fraud Detection :  Investigative Data Mining and Problems in Fraud Detection Investigative Data Mining - Definitions:  Investigative Data Mining - Definitions Investigative Official attempt to extract some truth, or insights, about criminal activity from data Data Mining Process of discovering, extracting and analysing of meaningful patterns, structure, models, and rules from large quantities of data. Spans several research areas such as database, machine learning, neural networks, data visualisation, statistics, and distributed data mining. Investigative Data Mining Applied to law enforcement, Industry, and Private databases Fraud Detection - Definitions:  Fraud Detection - Definitions Fraud Criminal deception, use of false representations to obtain an unjust advantage, or to injure the rights and interests of another Diversity of Fraud Against organisations, governments, and individuals Committed by external parties, internal management, and non-management employees Caused by customers, service providers, and suppliers Prevalent in insurance, credit card, and telecommunications Most common in automobile, travel, and household contents Cost of Fraud Automobile insurance fraud alone – AUD$32 million for nine Australian companies Fraud Detection Problems - Technical:  Fraud Detection Problems - Technical Imperfect data Usually not collected for data mining Inaccurate, incomplete, and irrelevant data attributes Highly skewed data Many more legitimate than fraudulent examples Higher chances of overfitting Black-box predictions Numerical outputs incomprehensible to people Fraud Detection Problems - Practical:  Fraud Detection Problems - Practical Lack of domain knowledge Important attributes, likely relationships, and known patterns Three types of fraud offenders and their modus operandi Great variety of fraud scenarios over time Soft fraud – Cost of investigation > Cost of fraud Hard fraud – Circumvents anti-fraud measures Assessing data mining potential Predictive accuracy are useless for skewed data sets Slide10:  Existing Fraud Detection Methods Widely Used Methods in Fraud Detection:  Widely Used Methods in Fraud Detection Insurance Fraud Cluster detection -> decision tree induction -> domain knowledge, statistical summaries, and visualisations Special case: neural network classification -> cluster detection Credit Card Fraud Decision tree and naive Bayesian classification -> stacking Telecommunications Fraud Cluster detection -> scores and rules Slide12:  The Crime Detection Method Comparisons with Minority Report:  Comparisons with Minority Report Precogs Foresee and prevent crime Each precog contains multiple classifiers Integration Mechanisms Combine predictions Analytical Machinery Record, study, compare, and represent predictions in simple terms Single “computer” Visual Symbols Explain the final predictions Graphical visualisations, numerical scores, and descriptive rules The Crime Detection Method:  The Crime Detection Method Classifiers as Precogs:  Classifiers as Precogs Precog One: Naive Bayesian Classifiers Statistical paradigm Simple and Fast Redundant and not normally distributed attributes* Precog Two: C4.5 Classifiers Computer metaphor Explain patterns and quite fast Scalability and efficiency issues* Precog Three: Backpropagation Classifiers Brain metaphor Long training times and extensive parameter tuning* Advantages and disadvantages *For details on how the problems were tackled, please refer to the thesis Combining Output as Integration Mechanisms:  Combining Output as Integration Mechanisms Cross Validation Divides training data into eleven data partitions Each data partition used for training, testing, and evaluation once* Slightly better success rate Bagging Unweighted majority voting on each example or instance Combine predictions from same algorithm or different algorithms* Increases success rate *For details on how the technique works, please refer to the thesis Combining Output as Integration Mechanisms:  Combining Output as Integration Mechanisms Stacking Meta-classifier Base classifiers present predictions to meta-classifier* Determines the most reliable classifiers *For details on how the technique works, please refer to the thesis Combining Output as Integration Mechanisms:  Combining Output as Integration Mechanisms Stacking (2) Cluster Detection as Analytical Machinery Visualisation Techniques as Visual Symbols:  Cluster Detection as Analytical Machinery Visualisation Techniques as Visual Symbols Analytical Machinery: Self Organising Maps Clusters high dimensional elements into more simple, low dimensional maps Automatically groups similar instances together Do not specify an easy-to-understand model* Visual Symbols: Classification and Clustering Visualisations Classification visualisation – confusion matrix - naive Bayesian visualisation Clustering visualisation - column graph *For details on how the problems were tackled, please refer to the thesis Steps in the Crime Detection Method:  Steps in the Crime Detection Method Slide21:  Implementing the Crime Detection System: Preparation Component The Crime Detection System:  The Crime Detection System The Crime Detection System: Preparation Component:  The Crime Detection System: Preparation Component Problem Understanding Determine investigation objectives - Choose - Explain Assess situation - Available tools - Available data set - Cost model* Determine data mining objectives - Max hits/Min false alarms Produce project plan - Time - Tools *For details, refer to the thesis The Crime Detection System: Preparation Component:  The Crime Detection System: Preparation Component Data Understanding Describe data - 11550 examples (1994 and 1995) - 3870 instances (1996) - 33 attributes - 6% fraudulent Explore data - Claim trends by month - Age of vehicles - Age of policy holder Verify data - Good data quality - Duplicate attribute, highly skewed attributes The Crime Detection System: Preparation Component:  The Crime Detection System: Preparation Component Data Preparation Select data - All, except one attribute, are retained for analysis Clean data - Missing values replaced - Spelling mistakes corrected Format data - All characters converted to lowercase - Underscore symbol The Crime Detection System: Preparation Component:  The Crime Detection System: Preparation Component Data Preparation Construct data - Derived attributes - weeks_past* - is_holidayweek_claim* - age_price_wsum* - Numerical input - 14 attributes scaled between 0 and 1 - 19 attributes represented by one-of-N or binary encoding* *For details, refer to the thesis The Crime Detection System: Preparation Component:  The Crime Detection System: Preparation Component Data Preparation Partition data - Data multiplication or oversampling - For example, 50/50 distribution Slide28:  Implementing the Crime Detection System: Action Component The Crime Detection System: Action Component:  The Crime Detection System: Action Component Modelling Generate experiment design (1) The Crime Detection System: Action Component:  The Crime Detection System: Action Component Modelling Generate experiment design (2) The Crime Detection System: Action Component:  The Crime Detection System: Action Component Modelling Build models (1) - Bagged X outperformed Averaged W - Bagged Z performed marginally better than Averaged Y - Experiment II achieved highest cost savings than I and III - 40/60 distribution most appropriate under the cost model - Experiment V achieved highest cost savings than II and IV - C4.5 algorithm is the best algorithm for the data set The Crime Detection System: Action Component:  The Crime Detection System: Action Component Modelling Build models (2) - Experiment VIII achieved slightly better cost savings than V - Combining models from different algorithms is better than the single algorithm - The top 15 classifiers from stacking consisted of 9 C4.5, 4 backpropagation, and 2 naive Bayesian classifiers* *For details, refer to the thesis The Crime Detection System: Action Component:  The Crime Detection System: Action Component Modelling Build models (3) - No scores from D2K software - Experiment IX demonstrates sorted scores and predefined thresholds result in focused investigations* - Satisfies Pareto’s Law - Rules did not provide insights - Already in domain knowledge and data attribute exploration* - Experiment X requires 5 clusters for visualisation* - age_of_policyholder - weeks_past, is_holidayweek_claim - make, accident_area, vehicle_category, age_price_wsum, number_of_cars, base_policy *For details, refer to the thesis The Crime Detection System: Action Component:  The Crime Detection System: Action Component Modelling Assess models (1) - Training and score data sets too small* - Student’s t-test with k-1 degrees of freedom* - McNemar’s hypothesis test* *For details, refer to the thesis The Crime Detection System: Action Component:  The Crime Detection System: Action Component Modelling Assess models (2) - Clusters 1, 2, and 3 have higher occurrences of fraud in 1996 - Clusters 1, 3, and 5 consist of several makes of inexpensive cars - Utility vehicles, rural areas, and liability policies - Clusters 2 and 4 contain claims submitted many weeks after the “accidents” - Toyota, sport cars, and multiple policies The Crime Detection System: Action Component:  Modelling Assess models (3) - Statistical evaluation of descriptive cluster profiles - Cluster 4 - 3121 Toyota car claims, 6% or 187 fraudulent - 2148 Toyota sedan car claims, expect 6% or 129 to be fraudulent with ±10 standard deviation - Actual 171 fraudulent Toyota sedan car claims, z-score of 3.8 standard deviation - This is an insight because it is statistically reliable, not known previously, and actionable The Crime Detection System: Action Component The Crime Detection System: Action Component:  The Crime Detection System: Action Component Modelling Assess models (4) - Append main predictions from 3 algorithms and final predictions from bagging to 615 fraudulent instances - 25 cannot be detected by any algorithms, highest lift in Clusters 1 and 2 - All can be detected by at least 1 algorithm in Cluster 3 - Not all fraudulent instances can be detected - Domain knowledge, cluster detection, and statistics offer explanation - 101 cannot be detected by 2 algorithms - Weakness of bagging - Other alternatives The Crime Detection System: Action Component:  The Crime Detection System: Action Component Evaluation Evaluate results - Experiment VIII generate the best predictions with cost savings of about $168, 000. This is almost 30% of total cost savings possible - Most statistically reliable insight is the knowledge of 21 to 25 year olds who drive sport cars Review process - Unsupervised learning to derive clusters first - More training data partitions - More skewed distributions - Cost model too simplistic - Probabilistic Neural Networks The Crime Detection System: Action Component:  The Crime Detection System: Action Component Deployment Plan deployment - Manage geographically distributed databases using distributed data mining - Take time into account Plan monitoring and maintenance - Determined by rate of change in external environment and organisational requirements - Rebuild models when cost savings are below a certain percentage of maximum cost savings possible Slide40:  Contributions and Recommendations Contributions:  Contributions New Crime Detection Method Crime Detection System Cost Model Visualisations Statistics Score-based Feature Extensive Literature Review In-depth Analysis of Algorithms Recommendations – Technical Problems:  Recommendations – Technical Problems Imperfect data Statistical evaluation and confidence intervals Preparation component of crime detection system Derived attributes Cross validation Highly skewed data Partitioned data with most appropriate distribution Cost model Black-box predictions Classification and clustering visualisation Sorted scores and predefined thresholds, rules Recommendations – Practical Problems:  Recommendations – Practical Problems Lack of domain knowledge Action component of crime detection system Extensive literature review Great variety of fraud scenarios over time SOM Crime detection method Choice of algorithms Assessing data mining potential Quality and quantity of data Cost model z-scores Slide44:  INVESTIGATIVE DATA MINING IN FRAUD DETECTION Scores are numbers with a specified range, which indicates the relative risk that a particular data instance maybe fraudulent, to rank instances Rules are expressions in the form of Body → Head, where Body describes the conditions under which the rule is generated and Head is the class label Figure 1: Predictions using Precogs, Analytical Machinery, and Visual Symbols Transforming Minority Report from Science Fiction to Science Fact: 1 INTRODUCTION The world is overwhelmed with terabytes of data but there are only few effective and efficient ways to analyse and interpret it. The purpose of the research is to simulate the Precrime System from the science fiction novel, Minority Report, using data mining methods and techniques, to extract insights from enormous amounts of data to detect white-collar crime The application is in uncovering fraudulent claims in automobile insurance The objectives are to overcome the technical and practical problems of data mining in fraud detection 3 RESULTS ON AUTOMOBILE INSURANCE DATA Through the use of integration mechanisms, the highest cost savings is achieved The analytical machinery facilitated the interesting discovery of 21 to 25 year old fraudsters who used sport cars as their crime tool 4 DISCUSSION Black-box approach from the precogs are transformed into a semi-transparent approach by using analytical machinery and visual symbols to analyse and interpret the predictions Precogs can be shared between organisations to increase the accuracy of the predictions, without violating competitive and legal requirements The analytical machinery transforms multidimensional data into two-dimensional clusters which contain similar data to enable the data analyst to easily differentiate the groups of fraud. It also allows the data analyst to assess the algorithms’ ability to cope with evolving fraud The crime detection method provides a flexible step-by-step approach to generating predictions from any three algorithms, and uses some form of integration mechanisms to increase the likelihood of correct final predictions 5 CONCLUSION Other possible applications of this crime detection method are: Anti-terrorism Burglary Customs declaration fraud Drug-related homocides Drug smuggling Government financial transactions Sexual offences 2 THE CRIME DETECTION METHOD Precogs, or precognitive elements, are entities which have the knowledge to predict that something will happen. Figure 1 uses three precogs to foresee and prevent crime by stopping potentially guilty criminals Each precog contains multiple classification models, or classifiers, trained with one data mining technique to extrapolate the future The three precogs are different from each other because they are trained by different data mining algorithms. For example, the first, second, and third precog are trained using naive Bayesian, C4.5, and backpropagation algorithms. The precogs require numerical inputs of past examples to output corresponding predictions for new instances Integration Mechanisms are needed. As each precog outputs its many predictions for each instance, all are counted and the class with the highest tally is chosen as the main prediction Figure 1 shows that the main predictions can be combined either by majority count (bagging) or the predictions can be fed back into one of the precogs (stacking), to derive a final prediction Analytical Machinery, or cluster detection, records, studies, compares, and represents the precogs’ predictions in easily understood terms The analytical machinery is represented by the Self Organising Map (SOM) which clusters the similar data into groups Figure 1 demonstrates that main predictions and final predictions are appended to the clustered data to determine the fraud characteristics which cannot be detected, and the most important attributes are selected for visualisation Visual Symbols, or visualisations, integrate human perceptual abilities in the data analysis process by presenting the data in some visual and interactive form The naive Bayesian and C4.5 visualisations facilitate analysis of classifier predictions and performance, and column graphs aid the interpretation of clustering results REFERENCES Dick P K (1956) Minority Report, Orion Publishing Group, London, Great Britain. Done by Clifton Phua for Honours 2003 Supervised by Dr. Damminda Alahakoon Slide45:  Questions?

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