Recommendation systems

Recommendation systems are another example of AI technology that has been weaved into our everyday lives. Amazon, YouTube, Netflix, LinkedIn, and Facebook all rely on recommendation technology and we don't even realize we are using it. Recommendation systems rely heavily on data and the more data that is at their disposable, the more powerful they become. It is not coincidence that these companies have some of the biggest market caps in the world and their power comes from them being able to harness the hidden power in their customer's data. Expect this trend to continue in the future.

What is a recommendation? Let's answer the question by first exploring what it is not. It is not a definitive answer. Certain questions like "what is two plus two?" or "how many moons does Saturn have?" have a definite answer and there is no room for subjectivity. Other questions like "what is your favorite movie?" or "do you like radishes?" are completely subjective and the answer is going to depend on the person answering the question. Some machine learning algorithms thrive with this kind of "fuzziness." Again, these recommendations can have tremendous implications.

Think of the consequences of Amazon constantly recommending a product versus another. The company that makes the recommended product will thrive and the company that makes the product that was not recommended could go out of business if it doesn't find alternative ways to distribute and sell its product.

One of the ways that a recommender system can improve is by having previous selections from users of the system. If you visit an e-commerce site for the first time and you don't have an order history, the site will have a hard time making a recommendation tailored to you. If you purchase sneakers, the website now has one data point that it can start using as a starting point. Depending on the sophistication of the system, it might recommend a different pair of sneakers, a pair of athletic socks, or maybe even a basketball (if the shoes were high-tops).

An important component of good recommendation systems is a randomization factor that occasionally "goes out on a limb" and makes oddball recommendations that might not be that related to the initial user's choices. Recommender systems don't just learn from history to find similar recommendations, but they also attempt to make new recommendations that might not be related at first blush. For example, a Netflix user might watch "The Godfather" and Netflix might start recommending Al Pacino movies or mobster movies. But it might recommend "Bourne Identity," which is a stretch. If the user does not take the recommendation or does not watch the movie, the algorithm will learn from this and avoid other movies like the "Bourne Identity" (for example any movies that have Jason Bourne as the main character).

As recommender systems get better, the possibilities are exciting. They will be able to power personal digital assistants and become your personal butler that has intimate knowledge of your likes and dislikes and can make great suggestions that you might have not thought about. Some of the areas where recommendations can benefit from these systems are:

• Restaurants
• Movies
• Music
• Potential partners (online dating)
• Books and articles
• Search results
• Financial services (robo-advisors)

Some notable specific examples of recommender systems follow:

Netflix Prize

A contest that created a lot of buzz in the recommender system community was the Netflix Prize. From 2006 to 2009, Netflix sponsored a competition with a grand prize of one million US dollars. Netflix made available a dataset of 100 million plus ratings.

Netflix offered to pay the prize to the team that offered the highest accuracy in their recommendations and was 10% more accurate than the recommendations from Netflix's existing recommender system. The competition energized research for new and more accurate algorithms. In September 2009, the grand prize was awarded to the BellKor's Pragmatic Chaos team.

Pandora

Pandora is one of the leading music services. Unlike other companies like Apple and Amazon, Pandora's exclusive focus is as a music service. One of Pandora's salient service features is the concept of customized radio stations. These "stations" allow users to play music by genre. As you can imagine, recommender systems are at the core of this functionality.

Pandora's recommender is built on multiple tiers:

• First, their team of music experts annotates songs based on genre, rhythm, and progression.
• These annotations are transformed into a vector for comparing song similarity. This approach promotes the presentation of "long tail" or obscure music from unknown artists that nonetheless could be a good fit for individual listeners.
• The service also heavily relies on user feedback and uses it to continuously enhance the service. Pandora has collected over 75 billion feedback data points on listener preferences.
• The Pandora recommendation engine can then perform personalized filtering based on a listener's preferences using their previous selections, geography, and other demographic data.

In total, Pandora's recommender uses around 70 different algorithms, including 10 to analyze content, 40 to process collective intelligence, and about another 30 to do personalized filtering.

Betterment

Robo-advisors are recommendation engines that provide investment or financial advice and management with minimal human involvement. These services use machine learning to automatically allocate, manage, and optimize a customer's asset mix. They can offer these services at a lower cost than traditional advisors because their overhead is lower, and their approach is more scalable.

There is now fierce competition in this space with well over 100 companies offering these kinds of services. Robo-advisors are considered a tremendous breakthrough. Formerly, wealth management services were an exclusive and expensive service reserved for high net worth individuals. Robo-advisors promise to bring a similar service to a broader audience with lower costs compared to the traditional human-enabled services. Robo-advisors could potentially allocate investments in a wide variety of investment products like stocks, bonds, futures, commodities, real estate, and other exotic investments. However, to keep things simple investments are often constrained to exchange traded funds (ETFs).

As we mentioned there are many companies offering robo-advice. As an example, you might want to investigate Betterment to learn more about this topic. After filling out a risk questionnaire, Betterment will provide users with a customized, diversified portfolio. Betterment will normally recommend a mix of low-fee stock and bond index funds. Betterment charges an administration fee (as a percentage of the portfolio) but it is lower than most human-powered services. Please note that we are not endorsing this service and we only mention it as an example of a recommendation engine in the financial sector.