July 8, 2011
In recent TV shows we have had endless doctors, lawyers, scientists, detectives and even sailors solving crime: now we have mathematicians in the CBS show Numb3rs. In some recent episodes mathematics is used in the following ways:
Predict Sniper Attacks (Exponential Modeling)
Locate Fraudulent Social Security Numbers (Statistical Sampling)
Understand an Epidemic (Graph theory)
Track Down a Dirty Bomb (Exponential Series)
Here’s a quote from the opening of the show,
“We all use math every day; to predict weather, to tell time, to handle money. Math is more than formulas or equations; it’s logic, it’s rationality, it’s using your mind to solve the biggest mysteries we know.”
Mathematics should be one of the key competencies of a pricing group, and pricing groups should feel comfortable making recommendations based on it, and being able to explain mathematical logic.
Now the show Numb3rs is fiction, but in the real world of pricing, mathematics can be used to
Find an optimal segmentation tree (CHAID and C&RT)
Tease out value-based proxy variables from a cloud of invoice prices (Regression Analysis)
Price Guidance (Price Band Analysis via percentiles)
Detect and remove pricing outliers (K-means clustering)
The book Supercrunchers: Why Thinking-by-Numbers Is the New Way to Be Smart talks of pioneers who ‘think by numbers’ to find patterns in human behaviour and predict the future, with staggeringly accurate results. Mathematicians used to get snaffled up by Banks who used them to build complex models, but now we see them in pricing companies, driving pricing science to higher levels.
Do the Math.