Anomaly detection

Lotus Labs
4 min readSep 17, 2024

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Anomaly detection is a powerful tool for identifying data points, patterns, or events that deviate from expected behavior. Whether it’s catching an unauthorized transaction, detecting a potential cyber threat, or flagging an abnormal health reading, anomaly detection plays a critical role in safeguarding operations across various industries.

Anomalies, or outliers, represent data that diverges significantly from the norm. These could be anything from unexpected spikes in network traffic and irregular spending patterns to sudden changes in a patient’s vital signs. Identifying these anomalies is crucial, as they often indicate potential fraud, security vulnerabilities, equipment failures, or medical emergencies.

In today’s data-rich environment, where vast amounts of information flow continuously — such as financial transactions, network logs, and health metrics — anomalies can easily go unnoticed. Anomaly detection systems are designed to sift through this data, pinpointing irregularities that warrant further attention. These systems do more than just react; they learn from patterns over time, improving their ability to detect subtle deviations and making them invaluable in fields such as finance, healthcare, and cybersecurity.

How Anomaly Detection Works

Anomaly detection techniques vary but share a common goal: identifying what doesn’t fit. Methods range from basic statistical approaches that highlight outliers to advanced machine learning models that learn normal behavior and flag deviations. Below are some common approaches:

Statistical Methods: Using averages, standard deviations, and other statistical measures to identify data points that fall outside expected ranges.

Machine Learning: Algorithms such as clustering, autoencoders, and deep learning that learn from data to identify patterns and detect anomalies.

Time Series Analysis: Techniques that monitor changes over time, identifying anomalies when the data exhibits unexpected behavior.

Applications of Anomaly Detection

  • Fraud Detection: Anomaly detection is widely used in finance to identify suspicious activities, such as unauthorized transactions or unusual spending patterns. For instance, banks use these systems to monitor account behavior, flagging unusual purchases or login attempts that might indicate fraud.
  • Network Security: In cybersecurity, anomaly detection helps protect networks by identifying activity that could signal a threat. This includes detecting unusual spikes in traffic, unauthorized access attempts, or abnormal data flows, allowing security teams to respond swiftly to potential breaches.
  • Healthcare: In healthcare, anomaly detection is used to monitor patient data in real-time, alerting medical staff to changes in vital signs that could indicate a critical condition. For example, detecting sudden changes in heart rate or oxygen levels can prompt timely interventions, potentially saving lives.

Technical Application

In this example, we used the Isolation Forest algorithm, a commonly used anomaly detection method, in order to detect fraudulent credit card transactions within a large dataset. Fraud detection is essential for financial institutions as it helps spot suspicious activity among many normal transactions. The dataset contained 284,807 transactions, with only 492 labeled as fraudulent, making it a challenge to identify the few fraud cases hidden among a vast number of legitimate ones.

The model predicted 485 fraud cases, which was close to the actual 492 fraud cases in the dataset.

However, a closer look at the results showed that the model had limitations in accurately identifying fraud. Specifically, the model correctly identified only 28% of the actual fraud cases, and many of the transactions flagged as fraud were actually legitimate. The precision for fraud detection was 29%, meaning only 29% of the flagged fraud transactions were truly fraudulent. On the positive side, the model was highly accurate in recognizing non-fraud transactions, achieving a perfect score for normal transactions.

Out of all transactions, the model correctly identified 139 fraud cases but missed 353 fraud cases and mistakenly flagged 346 normal transactions as fraud. Despite an overall accuracy of nearly 100%, this high accuracy is misleading due to the overwhelming number of correct non-fraud classifications.

Overall, while the model performed well in identifying normal transactions, its challenges in fraud detection suggest the need for further refinement. Enhancing fraud detection models is crucial to better capture the rare instances of fraud without overwhelming the system with false positives, ultimately providing a more reliable safeguard against financial crimes.

Anomaly detection is crucial for spotting unusual or suspicious activity in various fields, including finance, cybersecurity, and healthcare. It helps identify potential issues like fraud, security threats, or medical emergencies by flagging data that deviates from what is expected. With the vast amount of data generated daily, these systems play a key role in catching problems that might otherwise go unnoticed.

Different approaches are used for anomaly detection, ranging from basic statistical methods to advanced machine learning techniques. Although these systems can be very effective, they often need further refinement to improve accuracy and reduce false alarms.

In essence, while anomaly detection systems are powerful tools for identifying potential issues, ongoing improvements are needed to make them even more reliable in protecting against various threats.

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Lotus Labs
Lotus Labs

Written by Lotus Labs

Transform your business into an AI-driven enterprise. We specialize in Machine learning for Retail, Insurance, and Healthcare industries. www.lotuslabs.ai