Computational Models

Understand and predict behavior of systems

Of growing importance in many fields My modeling experience

Quantitative Financial Analyst Bioengineering Research Internet Marketing Analyst

Types of Models

Statistical Models Equations that describe behavior in

terms of random variables and their associated probability distributions

Theoretical Models Equations that describe behavior in

terms of understood relationships Models tend to inherit bits and pieces from

both schools of thought

Statistical Model might have predicted an upward trending home prices over time. On the other hand, a Theoretical Model might have taken into account the increasing price per income ratio as an indicator of unsustainable growth for home prices.

Direct correlation between gaseous Carbon Dioxide concentration and Temperature; obvious from both a statistical and theoretical standpoint.

Modern Applications of Modeling

Computational Finance Optimal Portfolio Theory and Risk Analysis

Bioinformatics Biological Models and Application

Internet Marketing Using transaction data to target consumers

Internet Security Case Study: Online Casinos

Computational Finance

Optimal Portfolio Theory Choosing the best risk-reward combination

for a given set of risk preferences Models are used to understand the

historical risk-reward relationship for a given set of securities

Requires sophisticated information management capability

Constant collection of new data Quick processing to react to markets

Determining the set of attainable portfolios requires a great deal of historical market data to calculate quantities such as market risk and expected portfolio return

Risk Analysis Value of a security/portfolio is a function

of a series of market variables Interest Rates for Fixed Income S&P 500 for Equities

Stress Testing Calculate the value of the security/portfolio

under extreme market conditions Allows the quantification of risk

Computational Finance

Risk Quantification

Once you have a model that values a security based on market conditions you need only to see how the security value changes in poor market conditions to understand the securities risk.

Methodology is highly dependent on the accuracy of your valuation model.

Information Management

Market Traders require Collection of accurate, timely data Ability to process this data with models

and reporting quickly Necessitates huge Information Technology

resources for quantitatively driven investment firms

Business Intelligence Software

Bioinformatics

Modeling Biological Systems Computer simulations of cellular sub-

systems Used to analyze and visualize sub-system Includes cellular sub-systems like

Metabolism as a function of Metabolite/Enzyme interactions

Signal Transduction Pathways Gene Regulatory Networks

Slicing and Dicing the Problem Finding the most effective way to model

biological systems Many different kinds of approaches

Start with DNA Gene Expression Models to understand

protein production Go straight to proteins

Look directly at enzymes to understand metabolism

Balancing complexity and accuracy

Translate these interactions into a set of differential

equations that approximate reality.

Develop an objective function which optimizes for a particular condition

Example: Maximize Glucose Concentration

Cellular subsystem has become an operations research problem

Modeling extremely important when using bacteria to manufacture chemicals and proteins

Applications: Bioprocess Engineering

Modeling is of huge importance for manufacturing processes that use bacteria to mass produce

Proteins, i.e. insulin Industrial Chemicals, i.e. ethanol

Requires huge computing resources High Performance Computing Large dollar amounts associated with

better modeling and computation

Internet Marketing

Predicting consumer behavior using historical data

Grouping transactional data in ways that make consumer preferences evident

Requires business intelligence software ROLAP Data Cubes, etc.

Using models to find the correct advertising for a particular audience

Question is how to organize the two?

Organizing Your Audience

Finding groups within your audience Group users by

Specific Qualities Location, Age, Gender

Recorded Actions Mouse movements/clicks Completed transactions

Documented interests

Requires storing information on your users within a comprehensive user database

Organizing Your Advertising

Finding groups among your ads Using different categories to classify ads

Popular, Gaming, Movies, etc. Tracking what audiences prefer your ads

i.e. a particular age group completes the ad Developing associations among your ads

A user who has completed Ad X is very likely to complete Ad Y

All of these grouping mechanisms allow for better management of advertising inventory

Tools for identifying/creating Groups

Decision Trees to identify trends

Regression models to compress the data into simple decisions, i.e. probability of posting an ad to a particular group of users

Internet Security

Internet Solutions are used to manage and control business assets

Internet security protects of these assets Case Study: Online Casinos

Most people think about internet security as protecting from external threats such as hackers

Online Casinos need to protect themselves from internal threats, people gaming their casino

Securing An Online Casino

Types of Internal Attackers Chip Dumping

Using an online casino to transport money across country lines

Player Collusion Multiple players working together to game

other players or the house Foreign Exchange Fraud

Taking advantage of online casinos foreign exchange conversion methodologies

Detection & Prevention

Develop logic to detect and prevent various internal threats using business intelligence applications

Example: Player Collusion If two users, or two IP addresses, are

seen in the same room together more than twice in a single week, flag the users as colluders and take preventive measures against their IP addresses and/or their particular user identification.

Example: Chip Dumping If a certain transaction limit is breached, say

one thousand dollars, between two users in separate countries, block the transaction and require manual approval

Creates a large enough barrier that persons looking to transport money internationally will look for other means

Example: Foreign Exchange Fraud Lock exchange rates on for each

transaction, so a user cannot convert between currencies at a loss for the casino

Update exchange rates frequently to minimize casino exchange rate risk

Conclusion

Creation and Implementation of modeling is proving increasingly useful in many places

Models operate within computer systems and can even modify computer systems

Models depend on Computation Implementation (Actions/Outputs) Data management (Inputs) Business Intelligence (Development)