THE PROMISE AND Capabilities OF AI

AIM: Sessions 01-04

What to expect from artificial intelligence.
Managing machines: The challenge ahead.. Sasanka Sekhar Chanda
Machine Learning and the market for intelligence.
The next scientific revolution: How data mashups can help save the world. IIM Indore
Not Covered: Algorithms need managers too!
Dec 2021 to March 2022

Professor Sasanka Sekhar Chanda prepared this material only for academic use by students of the course Artificial
Intelligence in Management, at the Indian Institute of Management Indore. This material is not meant to be a
substitute for the course material; rather, it supplements the course material by drawing attention to some important
aspects. Errors, if any, are regretted. AI in management is a new area. Participants are encouraged to seek independent
validation of concepts discussed. Not for commercial use. 1
Content

1. Machine Learning AI
2. What AI cannot do (yet)?
3. Computing & Neural Networks
4. How exactly does decision-making
using AI-ML differ from conventional
Analytics-based approaches?
5. Machine Learning Algorithms
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1. Machine Learning AI

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Origins

• Nobel Laureate Herbert Simon had predicted that:

• In the 21st century humans (and businesses) will find it problematic to
cope, upon being swamped with data
• There will be an overload of information
• It will be difficult to humans to make sense of the data
• AI endeavors to address this problem

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How does AI address information overload?

• The strength of AI lies in:

• The ability to take masses of information (generated from myriad
sources) and generate information about relationships (insights)
within the data.
• In one approach*, computers are programmed to learn from example
data or past experience. The insight regarding relationships is applied
on new data (on which the computer has not been trained) to make
predictions. [*machine learning]

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Managerial Insight

A machine learning oriented AI solution may be considered

in those scenarios where there is surfeit of data AND there is
a business need to make predictions—to help decide future
courses of action—based on **some kind of**
understanding of the relationships between various relevant
dimensions suggested by prior data.

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Machine Learning: Some application domains
• Predicting default on loans
• Image classification
• Fraud detection in banking
• Suggestions to divert (re-route) traffic based on congestion build-up
in regular routes [the Waze app helps optimize travel time]

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Machine Learning: Finding Relationships

• Consider an AI app used to predict the probability of default on loan

to be taken by a prospective applicant
• The app will have access to prior data on a number of dimensions related to
the loans made out in the past and the result Default/no Default.
• Age, Education (level, schools studied in), Gender, Ethnicity, Annual Income,
Employment or Profession (salaried /business / self), home ownership,
location of residence, number of dependents, bank balances, credit score,
purchases history, medical history of illnesses
• The logic of the AI app will construct various combinations of dimension
values (or tree(s) where each node is a dimension and each child is a valid
value for that dimension), to get the sharpest possible separation between
Default/no Default cases.
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Some hypothetical examples of working of Machine learning:
finding relationships between dimensions of data

If an applicant is a 50+ year-old self-employed male having annual income

less than $24,000, the probability of default on a sub-$10K loan is 50%, and
on a $10K+ loan is 85%.

If an applicant is a 27-32 year old woman having and MBA from Harvard,
and is residing in an upper middle-class locality, the probability of defaulting
on a $100K+ loan is 0.5%.

Applicants who wear light-colored shirts in weekends are quite unlikely to

repay timely (say probability of timely repayment is less than 25%) !

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Managerial Insight
In order to make predictions a machine learning oriented AI solution
may rely on bizarre cause-effect relationships (statistical correlations)
between
[A] dimensions of the data it is fed and
[B] the outcomes of interest.
In most cases the relationships will not be available for viewing in
human-readable form.

For critical decisions the role of human judgment is paramount.

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2. What AI cannot do (yet)?

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AI fares poorly in Judgment related tasks

Artistic taste*
Ethical judgment**
Ability to define tasks well***
Emotional intelligence ****

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* Artistic taste

A genuine handwoven sari is much more

aesthetically pleasing, compared to a machine-made
sari. Why?

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** Ethical judgment

[Human owner of AI]. Alexa please help stop

humans suffering from cancer.

Alexa obeys – by killing all humans.

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 *** Ability to define tasks well

https://www.vice.com/en_us/article/evj9bm/adversarial-design-shirt-makes-you-invisible-to-ai

https://www.google.com/url?sa=i&url=https%3A%2F%2Fwww.theguardian.com%2Ftechnology%2F2015%2Fjun%2F18%2Fgoogle-image-recognition-neural-network-androids-
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dream-electric-sheep&psig=AOvVaw1nTEiu-nInk70nDstmNXMv&ust=1605074109598000&source=images&cd=vfe&ved=0CAIQjRxqFwoTCNCpur6m9-wCFQAAAAAdAAAAABAz
*** Emotional Intelligence

1. An English sentence was translated to Russian by a

computer and then the Russian sentence was
translated back into English by a computer. It read as
“The Vodka is good but the meat has gone bad.”

Can you guess the original English sentence?

2. Siri, call me an ambulance!

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Human judgment vs. AI

• Human judgment is required for identifying and

applying the most useful inferences (i.e. predictions
from past data) and being able to weigh the relative
costs of different types of errors.

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Managerial Insight

If a way of arriving at an inference resides only in the minds

of humans and cannot be translated into something a
machine can understand, AI is inappropriate.

Understanding the level of judgment necessary to pursue

(business) actions is the key to determining what is given
over to AI, when, with what safeguards.

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Example of judgment heavy task (that is hard for AI):
Patient Care

• Involves imaging / data collection, diagnostics, choice of treatment

(requires judgment) bedside manner (judgment as well as action) and
intervention (say increasing oxygen flow).
• AI can do only a subset of tasks, guided by design made by humans.
• Different patients have different needs. Humans are better able to
respond.
• For example through physical intervention (e.g. hugging, caressing the
forehead) and emotional comfort (storytelling, recalling happy events from
the past, engaging in discussing politics etc.)

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 Approach 2: AI learns from humans
• AI learns the best tricks and strategies from humans!
• Machines may learn to infer/predict better by “observing” how humans perform
• Humans have an ability to discover neat ways of doing things that would otherwise
take lot of science to evaluate. For example the gaze heuristic to catch a cricket ball
• Example 1: In 2016, AlphaGo, Google’s DeepMind AI program
succeeded in beating a top human player.
• AlphaGo analyzed thousands of human-to-human Go games, playing against
itself millions of times. The feedback on actions and outcomes helped AlphaGo
develop more accurate predictions and new strategies. Machine Intuition?
• Example 2: A vehicle may drive autonomously by mimicking what a
human driver would do in response to a set of inputs
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Scope of AI – “Cognitive Technologies”
• Machine Learning
• Computer Vision
• Speech Recognition
• Natural Language Processing
• Robotics
Computers can perform tasks that were earlier done only by humans:
Playing games (Chess, Go), recognizing faces and speech, making
decisions under uncertainty, learning, translating between languages.

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Why AI- Machine Learning is proliferating?

• Advances in computational speed, data storage, data

retrieval, technology for sensors, and algorithms have
reduced the cost of predictions based on machine learning

• There is also rising collection of data from mobile devices,

wearable, IoT devices, compulsory government mandating
(think Aadhar, contact tracing apps like Aarogya Setu), and
through gamification (Pokemon Go, FaceApp Challenge, Tik
Tok, Instagram Reels etc.)
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Managerial implications
• Managers need to develop ability to discern where AI can be
effectively (and productively ) used
• Will require weighing of relative costs of different types of errors
• Managers need to ponder, how AI that is already used can produce
better outcomes over time
• Deploying improved AI agents to obtain superior outcomes
• Determine the rate and direction of adoption of AI technologies
• Keep updating the mix of human judgment and AI capability
• Upon the advent of AI, the nature of task changes, hence employee
hiring/promotion criteria changes as well.
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Exercise 1
• Google’s Inbox by Gmail processes incoming email messages and
proposes a limited set of short responses, for the human email
owner (end user) to pick from. AI is used in digesting prior email
interaction by the user, to determine what kind of incoming email
merit what sort of probable responses
• List 3-5 instances where above assistance by AI is helpful, clearly
identifying why the AI intervention is valuable (to the End User, and
to Google / Alphabet Inc.)
• List 3-5 instances where above assistance by AI can be a hindrance to
the end-user, discussing why that is the case.

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3. Computing & Neural Networks

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Genealogy of Computing

• First generation computing: Used Switches & Wires (Morse

code?)
• 2nd Gen: Transistors were used (Simple Punch card reader
machines?)
• 3rd Gen: Solid State technology, use of integrated circuits
(ICs), and higher level languages like COBOL, Fortran, and “C”
• 4th Gen: Code generators (underlying visual drag and drop apps, Excel
Pivot Table etc.)

There are more generations …

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5th Gen: Expert Systems. A programmer elicits
knowledge from a human expert and makes rules using
statistical techniques and “IF and THEN” statements.

5.5 Gen: Fuzzy Logic. Solving multi-goal problems with

inexact quantification of parameter data

6th Gen: Artificial Neural Networks: Mimics human

brain (poorly)

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Before Neural Networks

• Expert systems provides quantifiable answers to single-goal

problems
• Fuzzy logic concerns use of statistical techniques to take in data
fitting approximate categories, for solving multi-goal problems
• Neither expert systems, nor fuzzy logic can function in
circumstances that have not been defined by the programmer

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 AI – Neural Networks

https://external-content.duckduckgo.com/iu/?u=https%3A%2F%2Ftse1.mm.bing.net%2Fth%3Fid%3DOIP.c2JCOquA53zqd4ST70VMOAHaGn%26pid%3DApi&f=1
https://external-content.duckduckgo.com/iu/?u=https%3A%2F%2Ftse1.mm.bing.net%2Fth%3Fid%3DOIP.3fA77_mLNiJTSgZFhYnU0QHaE2%26pid%3DApi&f=1

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Herbert Simon, Alan Newell, John McCarthy
and Marvin Minsky coined the term AI

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Neural Networks seek to imitate the functionality of
the human neural system

Uses complicated reasoning to identify patterns,

memorize the use-context of those patterns

Adjusts the way it operates as it accumulates data,

in the process appearing to learn from experience

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 The Human Brain
• There are about 100 billion neurons in the
human brain
• Each neuron can connect with 200,000
other neurons
• A biological neuron
• Receives inputs from other sources,
• combines them in *some* way, https://external-
• performs a genetically non-linear operation content.duckduckgo.com/iu/?u=https%3A%2F%2
on the result, and Ftse4.mm.bing.net%2Fth%3Fid%3DOIP.BdyFzYHK
RBIWNRagsBSdpQHaE9%26pid%3DApi&f=1
• outputs the final result

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The ANN we have in computing is much simpler …

• Inputs are fed into the network

• Each of these (inputs) is multiplied by a connection
weight
• These weights are then summed together, fed
through a transfer function, then sent to the
output

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 Inner mechanism of an ANN: The signal processing paradigm

https://external-content.duckduckgo.com/iu/?u=https%3A%2F%2Fwww.electronicshub.org%2Fwp-content%2Fuploads%2F2019%2F05%2FArtificial-Neural-Networks-ANN-Processing-Units.jpg&f=1&nofb=1

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Once a network has been structured for a
particular application, it is trained by means of
machine learning algorithms

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How learning occurs in the ANN

https://external-content.duckduckgo.com/iu/?u=https%3A%2F%2Ftse3.mm.bing.net%2Fth%3Fid%3DOIP.MaTvYkgr-be3UuY_Z_hxMQHaD4%26pid%3DApi&f=1
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Support Vector Machine (SVM) uses a 2-tier classifier to try to
separate a dataset into 2 groups using a line separator, trying to
find the largest margin between them.

Examples:
Likely to purchase product / Unlikely to purchase product
Will default / Unlikely to default

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More Use-cases of Artificial Neural
Networks (ANN)

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Finance Industry

Detecting credit card fraud

Increasing revenues of insurance Cos. through

(a) more intensive pre-contract vetting (apparently to
avoid adverse selection, but often to craft messages to attract
custom and design contractual terms such that payouts don’t
have to be made)
(b) more intrusive post-contract behavioral monitoring
(the moral hazard*)
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Biomedical applications

Early detection of diseases [But note the

false-positive scams]

Diagnosis of samples from patients

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Food for thought

If AI equipment miss-diagnoses a disease, or

fails to diagnose and there is no doctor
involved, who should be blamed?

The hospital, or the manufacturer of the AI

equipment?

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Machine Learning: Some Wins

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Machine learning can now predict onset of
congestive heart failure (in seniors), by
tracking biological parameters, particularly
after a high-salt meal

43
Several year’s worth of data collection on
flow of traffic on highways, weather reports,
local events, accidents etc. can predict traffic
jams

44
Data techniques can spot irregularities in
payments and receivables

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Crowd-sourcing of analysis of astronomical
images and data allowed us to learn that
there are roughly equal proportions of
galaxies turning clock-wise and anti-
clockwise, and identified some anomalie

Advent of “Citizen-Scientists”
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The Ocean Observatories Initiative (OOI) on
the floor of the Pacific records timestamps
data on phenomena, involving land, ocean
and atmospheric interactions. DNA
sequencers study microorganisms

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Managerial Insight

Neural Networks work on the basis of correlations

between various patterns in the data. AI systems have
no clue regarding the reason why two patterns are
correlated and how /when that matters.

Analogy: An AI system can ‘observe’ various things fall to the

ground—under the action of gravity, but AI is not aware of
gravity—and can ‘predict’ the time-path when presented with
a new thing having some similarity with past instances.
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4. How is decision-making by AI
different from decision-making using
Analytics approaches?

49
To understand the difference in decision-making
approaches, we need to know the differences
between:

DEDUCTION
INDUCTION
ABDUCTION

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DEDUCTION

BAG ?
√BOX

Given 1. The (large) BOX contains marbles, all of which are white.
Given 2. The (small) BAG is empty, initially.
Given 3. With eyes closed, I took out some marbles from the BOX and placed it in the BAG.
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Inference. I infer that the marbles in the BAG are white.
INDUCTION

BAG √
?BOX

Given 1. The (large) BOX contains marbles.

Given 2. The (small) BAG is empty, initially.
Given 3. With eyes closed, I took out some marbles from the BOX and placed it in the BAG.
Given 4. I find that all the marbles in the bag are white.
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Inference. I infer that all the marbles in the BOX are white.
ABDUCTION

? BAG √
√BOX

Given 1. The (large) BOX contains white marbles.

Given 2. The (small) BAG contains white marbles.
Inference. I infer that the marbles in the BAG came from the marbles in the BOX. 53
Spreadsheet Exercise

54
5. Machine learning algorithms

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The types of machine learning algorithms are
mainly divided into four categories:

- Supervised learning,
- Un-supervised learning,
- Semi-supervised learning, and
- Reinforcement learning

https://www.ecloudvalley.com/machine-learning/
56
In Supervised Learning both inputs and outputs are
provided.

The network processes the inputs and compares its

output with the outputs provided.

Errors get fed back, leading to adjustment of weights.

The process repeats.

Techniques: Regression and Classification, e.g. as applicable in Random Forest Algorithm

57
Random Forest algorithm (a technique mainly used for
supervised learning)

Random forest builds multiple decision trees and wtd. averages

results therefrom to get a more accurate and stable prediction

Random forest adds additional randomness to the model,

while growing the trees. Instead of searching for the most
important feature while splitting a node, it searches for the
best (or ‘better than a threshold’) feature among a random
subset of features.

https://builtin.com/data-science/random-forest-algorithm
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In Unsupervised Learning the network is
provided with inputs but not with desired outputs.

The System itself must decide what features it will

use to group the data

Techniques: Clustering and Association , Principal Components Analysis

Four common unsupervised tasks: clustering, visualization, dimensionality reduction , and

association rule learning.
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Clustering is an unsupervised machine
learning task that automatically divides the
data into clusters, or groups of similar items.

It does this without having been told how the

groups should look ahead of time. ... It
provides an insight into the natural groupings
found within data.

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Principal component analysis (PCA) is an
unsupervised technique used to pre-process
and reduce the dimensionality of high-
dimensional datasets while preserving the
original structure and relationships inherent
to the original dataset so that machine
learning models can still learn from them

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Data dimensionality reduction
In the presence of a dataset with a very high
number of data columns, it is good practice to
wonder how many of these data features are
actually really informative for the model.

Elimination of less useful data columns speed up algorithm operation.

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 Linear Discriminant Analysis (LDA). A number m of linear
combinations (discriminant functions) of the n input
features, with m < n, are produced to be uncorrelated and
to maximize class separation. These discriminant functions
become the new basis for the dataset.

All numeric columns in the dataset are projected onto

these linear discriminant functions, effectively moving the
dataset from the n-dimensionality to the m-
dimensionality.
https://thenewstack.io/3-new-techniques-for-data-dimensionality-reduction-in-machine-learning/
63
Use Cases of unsupervised machine
learning
Customer segmentation, or understanding
different customer groups around which to build
marketing or other business strategies.

Bioinformatics, for example genetic clustering and

sequencing of DNA patterns
Computer vision for object recognition.

64
Semi-supervised learning: A small amount of
data are labelled. The computer only need to
find features through labelled data and then
classify other data accordingly.

Show 10 photos each of elephants and giraffes, telling

the AI which is which. Now give it 200 photos (of
elephants and giraffes) and ask it to label as E/G

https://www.ecloudvalley.com/machine-learning/ 65
Reinforcement learning: The machine uses
observations gathered from the interaction with
the environment to take actions that would
maximize the reward or minimize the risk.

There are no labelled materials, but computer is

told which step is correct and which step is wrong.
According to the quality of the feedback, the
machine gradually amends its classification

https://www.ecloudvalley.com/machine-learning/ 66
Additional material

67
 seven techniques for dimensionality reduction
Missing Values Ratio. ...
Low Variance Filter. ...
High Correlation Filter. ...
Random Forests/Ensemble Trees. ...
Principal Component Analysis (PCA). ...
Backward Feature Elimination. ...
Forward Feature Construction.

3 More techniques: Linear Discriminant Analysis (LDA). Autoencoder,

t-distributed Stochastic Neighbor Embedding (t-SNE)

https://thenewstack.io/3-new-techniques-for-data-dimensionality-reduction-in-machine-learning/ 68
Pervasive data availability opens vistas for work of
Interdisciplinary nature As foreseen by
Simon, 1996
• Our capacity to organize, analyze, and store would be overcome
• AI comes to the rescue
• Computation and simulation now recognized as a 3rd paradigm for Sc.
• Creative insights and solutions are being developed from data
• Disciplines: Astronomy, biology, chemistry, hydrology, oceanography, physics,
zoology …
• Projects: Drug development, Alternative energy, Personalized Health care
• We now know HIV mutates in a few years as many times as the
influenza virus did in known history
• Next stop: zero in on elements the HIV is vulnerable
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