Customer and Business Analytics

Chapter 7

Tree Models

One method of predictive modeling, which we call tree models, but are also commonly referred to as decision trees or simply trees, generates a set of if-then rules that allow the use of predictor variables to predict target variables or make a decision. As a simple example of these types of decision rules, consider a rule used by a credit card company deciding whether to issue a Platinum Card to an applicant:

• “If monthly mortgage to income ratio is less than 28% and
• months posted late is less than 1, and
• salary is greater than $45,000,
• then issue a platinum card.”

The set of if-then rules for making the decision to issue an applicant a credit card can be graphically portrayed using a tree representation, as shown in