Lecture: Neural Networks

Actuarial Data Science - Open Learning Resource

Author

Fei Huang, UNSW Sydney

Learning Objectives

  • Neural networks and deep learning are increasingly used in insurance and finance, but they can feel intimidating. The aim of this lecture is to demystify the basic building blocks so that you can recognise when a simple neural network might be useful, and understand its strengths and limitations compared with more classical models.
  • Explain the idea of deep learning and neural networks
  • Describe the main characteristics of neural networks and the circumstances in which they should be considered as alternatives to the techniques previously discussed
  • Perform predictive modelling using simple neural networks

Introduction

Deep Learning

Deep learning has attracted significant attention across a wide range of applications:

  • Customer experience
  • Computer vision
  • Natural language processing
  • Autonomous vehicles
  • Robotics
  • Actuarial science (e.g. mortality forecasting)
  • …

Introduction

  • Artificial neural networks (ANNs) and deep learning (DL) are currently among the most actively studied machine learning methods.
  • What is deep learning? Multi-layer neural networks.
  • They are also among the most powerful predictive models.

See also: Google Trends comparing search interest in different methods.

Introduction (continued)

Growing use of deep learning at Google over time (adapted from Dean (2016)).

Introduction (continued)

  • Artificial neural networks (ANNs) have experienced several cycles of “rise and fall” in popularity over time.

  • They are inspired by biological studies of neural systems.

  • Why have they become popular again?

    • Advances in computing power: Graphics Processing Units (GPUs) are well suited for training ANNs.
    • Availability of large-scale datasets.
    • Development of improved training techniques (e.g. Hinton, Osindero, and Teh (2006).)

Neural Network Structure

Definition of A Single Neuron

Left: biological neuron (source: wikipedia); Right: a typical artificial neuron. y = f(\mathbf{x}) = \sigma\left(\sum_{i=1}^{n} w_i x_i + b \right) - \mathbf{x} = (x_1, \dots, x_n): input features
- w_i: weights
- b: bias term - \sigma(\cdot): activation function - y: output

Activation Functions

  • Transform the output of a neuron (e.g., scale it to (0,1) or (-1,1)).
  • Introduce nonlinearity into the model.
    • Without an activation function, a neural network reduces to a linear model.

Three commonly used activation functions: Sigmoid, Tanh, and ReLU.

Neural Network

  • A neural network is a network of neurons.
  • How are neurons connected?
    • The output of one neuron can be used as the input to one or more other neurons.

Connecting neurons to form a neural network.
  • For simplicity, we will use a simple circle to represent a neuron in the following slides.

Fully Connected Feed-Forward Neural Network

  • One classical way of organising neurons in a neural network is to arrange them in layers.
    • Neurons in the same layer do not connect to each other.
    • Neurons only connect to neurons in adjacent layers.
  • If the connections do not form cycles, it is called a feed-forward neural network.

A fully connected feed-forward neural network.

Feed-Forward Neural Network

  • Each output node of a feed-forward neural network can be viewed as a function y = f(\mathbf{x}), with weights w and biases b as parameters.

  • The function f is a composition of functions of the form

f(\mathbf{x}) = \sigma\Big( \sum w_L[i] \, \cdots \, \sigma\big( \sum w_2[i] \, \sigma(\sum w_1[i] x_i + b_1) + b_2 \big) \cdots + b_L \Big)

  • Note that the activation functions \sigma in the above expression can be different (for simplicity, we omit subscripts).

The Universal Approximation Theorem

  • (Theorem) Given enough hidden nodes, a one-hidden-layer feed-forward neural network with a linear output and sigmoid activation functions can approximate any continuous function to arbitrary accuracy on a closed and bounded input domain.

  • Many other activation functions also satisfy this property.

  • This theorem tells us that, even with one hidden layer, feed-forward neural networks can represent a wide range of candidate predictors — they are very powerful.

The Universal Approximation Theorem (continued)

Schematic illustration of the bias–variance trade-off (Source: The Elements of Statistical Learning (Hastie et al. 2009), Figure 7.2).

Output Layer for Regression and Classification

  • For regression, if the output range needs to be (-\infty,+\infty), the activation function in the output node is typically omitted.
  • For classification, the number of output nodes is usually equal to the number of classes. Each output node represents the score or probability that an observation belongs to a particular class.

Loss Function

  • As mentioned previously, a feed-forward neural network is just a function \hat{\mathbf{y}} = f(\mathbf{x}); that is, for an input \mathbf{x}, it generates a prediction \hat{\mathbf{y}}.
  • Given the true observation \mathbf{y}, we can define a prediction loss, as for any other prediction method: L = L(\mathbf{y}, \hat{\mathbf{y}}).
  • Example (regression): we can use the SSE loss L = \frac{1}{N}\sum_{i=1}^N (y_i - \hat{y}_i)^2.
  • Example (multi-class classification): we can use the cross-entropy loss.
    • The response variable is a vector \mathbf{y} with one-hot encoding.
    • The output of the neural network is also a vector, whose elements represent the probabilities that an observation belongs to each class.
    • The cross-entropy loss is defined as L = -\sum_{i=1}^{C} y_i \log(\hat{y}_i), where C is the number of classes.

Example 1: Neural Network for Linear Regression

If the output node has no activation function and the SSE loss is used, the following neural network is equivalent to a multiple linear regression model: y = w_1 x_1 + w_2 x_2 + w_3 x_3 + b. Neural network for linear regression

Example 2: Neural Network for Logistic Regression

If the output node uses a sigmoid activation function and the cross-entropy loss is used, the following neural network is equivalent to logistic regression for binary classification.

Neural network for logistic regression.

Example 3: Multi-class Classification

  • Use the cross-entropy loss.

  • The last layer uses the softmax function: \sigma(T)_k = \frac{e^{T_k}}{\sum_{l=1}^{K} e^{T_l}}, \quad k = 1, \dots, K where T_k is the score for class k, and K is the number of classes.

  • The softmax function converts the outputs into probabilities that sum to 1.

3-class classification

Shrinkage / Regularisation

Similar to other methods, we can add a shrinkage term to the loss function to achieve regularisation and reduce overfitting.

  • L_2 shrinkage: L(y, \hat{y}) + \lambda \lVert \mathbf{w} \rVert_2^2

  • L_1 shrinkage: L(y, \hat{y}) + \lambda \lVert \mathbf{w} \rVert_1

  • Note that the bias term b is usually not regularised.

Fitting Neural Networks

Scaling of the Inputs

  • The scaling of the inputs determines the effective scaling of the weights in the bottom layer, which can have a large effect on the quality of the final solution.
  • At the outset, it is best to standardise all inputs to have mean 0 and standard deviation 1.
  • This ensures all inputs are treated equally in the regularisation process.

Number of Hidden Units (Neurons) and Layers

  • Generally speaking, it is better to have too many hidden units than too few.
  • With too few hidden units (neurons), the model may not have enough flexibility to capture nonlinearities in the data.
  • With too many hidden units (neurons), the extra weights can be shrunk towards zero if appropriate regularisation is used.
  • It is most common to specify a reasonably large number of units and train them with regularisation.
  • The choice of the number of hidden layers is guided by background knowledge and experimentation.
  • Using multiple hidden layers allows the construction of hierarchical features at different levels of resolution.

Fitting Neural Network (1)

  • Neural networks are typically trained using gradient descent–type algorithms.

  • Recap: Gradient descent iteratively solves \arg\min_{\mathbf{x}} \, \mathcal{L}(\mathbf{x}) as follows:

    1. Initialise i = 0, \mathbf{x}_0.
    2. Repeat until a stopping criterion is satisfied:
      1. \mathbf{x}_{i+1} = \mathbf{x}_i - \gamma \nabla_{\mathbf{x}} \mathcal{L}(\mathbf{x}_i), where \gamma > 0 is a small constant.
      2. i \leftarrow i + 1.
    3. Output \mathbf{x}_i.

Gradient descent recap.

Fitting Neural Network (2)

  • For large neural networks and large training datasets, stochastic gradient descent (SGD) is typically used.
  • The key issue is how the gradients are computed. The answer is backpropagation.

In popular neural network toolboxes (e.g. TensorFlow, PyTorch, and Caffe), backpropagation is already implemented. Variants of (stochastic) gradient descent algorithms are also available, so one can simply choose an algorithm without needing to compute gradients or perform optimisation manually.

Main Challenges of Training Deep Neural Networks

  • The neural network loss function has a very complex, non-convex landscape.
  • Neural network models are very powerful and can easily overfit (e.g. requiring large datasets and techniques such as early stopping).
  • Large-scale data and computation: training often requires hardware acceleration, such as GPUs and TPUs.
  • Vanishing and exploding gradients.

Epoch, Batch Size, and Iteration

When the dataset is too large to be processed all at once, it is divided into smaller batches that are fed to the model sequentially.

  • Epochs: One epoch is when the entire dataset is passed forward and backward through the neural network once.
    • A hyper-parameter that controls the number of complete passes through the training dataset.
  • Batch size: The number of training observations in a single batch.
    • A hyper-parameter that controls how many observations are processed before updating the model parameters.
  • Iterations: The number of batches required to complete one epoch.
  • Example: Suppose we have 3000 training observations. If we divide the dataset into batches of size 500, then it takes 6 iterations to complete one epoch.

Different Gradient Descent Algorithms

  • Batch Gradient Descent: batch size = size of the training set
  • Stochastic Gradient Descent: batch size = 1
  • Mini-Batch Gradient Descent: 1 < batch size < size of the training set
    • In practice, common batch sizes include 32, 64, and 128, chosen to fit the memory constraints of GPU or CPU hardware.

Early Stopping

  • Stop training a neural network early, before it overfits the training dataset.
  • Stop training when the generalisation error increases (validation set approach).
  • Model selection (early stopping):

“Every time the error on the validation set improves, we store a copy of the model parameters. When the training algorithm terminates, we return these parameters, rather than the latest parameters.”

— Deep Learning (Goodfellow, Bengio, and Courville 2016)

Other Training Techniques

  • The performance of neural networks can be sensitive to the optimisation method used.
  • There are many tricks and heuristics. Here, we introduce one: dropout (regularisation).

Dropout

  • Dropout is a regularisation technique that helps prevent neural networks from overfitting.

Illustration of dropout (Source: Srivastava et al. (2014)).

More Complex Neural Networks

More Complex Neural Networks

  • We have learned some examples of fully connected feed-forward neural networks.
  • Neural networks can be highly flexible and versatile. For example, below is the LeNet architecture (a convolutional neural network), commonly used for image classification.

LeNet architecture (1998).

Some More Modern Deep Neural Networks

  • Modern Neural Network are mostly designed and used for,
    • Computer vision.
    • Speech recognition.
    • Natural language processing.
    • etc.
Example models
  • LSTM-based encode-decoder models
  • ResNet
  • Attention-based models
  • Transformers
  • These models have the potential to be adapted to actuarial applications when large-scale training data are available.
  • We may see increasing adoption of these methods in actuarial practice in the future.

Modern Deep Neural Networks: Complex Architectures

GoogLeNet (2014), winner of the ImageNet Large Scale Visual Recognition Challenge (Source: adapted by RidgeRun Developer from Szegedy et al. (2015)).

Mordern Deep Neural Network: Huge Number of Parameters.

Growth in the number of parameters of large neural networks over time (source: Microsoft Research (2020)).

Current “Published” Largest Neural Networks

  • GPT-3 (Generative Pre-trained Transformer 3)
  • Developed by OpenAI
  • Natural language modelling
  • 175 billion parameters
  • Estimated to cost millions of US dollars to train once using cloud computing resources

Current “Published” Largest Neural Networks (continued)

  • From the GPT-3 paper:

“… Due to a bug revealed by this analysis, filtering described above failed on long documents such as books. Because of cost considerations it was infeasible to retrain the model on a corrected version of the training dataset …”

— Brown et al. (2020) (supplementary materials)

  • There may be larger neural networks that are not publicly disclosed by large technology companies.

Software and Frameworks

Some popular deep learning frameworks.

Conclusions

  • Deep Neural Network can be very powerful.
  • There are many other fascinating (but often complex) deep learning models and applications that we have not covered. However, the fundamental concepts in these slides should prepare you for further study in this area.
  • Training large neural networks is computationally expensive and requires large amounts of data.
  • Neural networks are often difficult to interpret.
  • Due to the large number of parameters, model sizes can be very large (e.g. model compression and distillation can help address this).
  • Why neural networks work so well is still not fully understood.
  • When to use neural networks: when high predictive accuracy is required and interpretability is less important.

Using R

Using R

  • caret
  • neuralnet
  • ANN2
  • keras

References

Brown, Tom, Benjamin Mann, Nick Ryder, Melanie Subbiah, Jared D Kaplan, Prafulla Dhariwal, Arvind Neelakantan, et al. 2020. “Language Models Are Few-Shot Learners.” Advances in Neural Information Processing Systems 33: 1877–1901.
Dean, Jeff. 2016. “Large-Scale Deep Learning for Intelligent Computer Systems.” Slides, WSDM Conference. https://www.wsdm-conference.org/2016/slides/WSDM2016-Jeff-Dean.pdf.
Goodfellow, Ian, Yoshua Bengio, and Aaron Courville. 2016. Deep Learning. MIT Press.
Hastie, Trevor, Robert Tibshirani, Jerome Friedman, et al. 2009. “The Elements of Statistical Learning.” Springer series in statistics New-York.
Hinton, Geoffrey E, Simon Osindero, and Yee-Whye Teh. 2006. “A Fast Learning Algorithm for Deep Belief Nets.” Neural Computation 18 (7): 1527–54.
Microsoft Research. 2020. “Turing-NLG: A 17-Billion-Parameter Language Model by Microsoft.” https://www.microsoft.com/en-us/research/blog/turing-nlg-a-17-billion-parameter-language-model-by-microsoft/.
Srivastava, Nitish, Geoffrey Hinton, Alex Krizhevsky, Ilya Sutskever, and Ruslan Salakhutdinov. 2014. “Dropout: A Simple Way to Prevent Neural Networks from Overfitting.” The Journal of Machine Learning Research 15 (1): 1929–58.
Szegedy, Christian, Wei Liu, Yangqing Jia, Pierre Sermanet, Scott Reed, Dragomir Anguelov, Dumitru Erhan, Vincent Vanhoucke, and Andrew Rabinovich. 2015. “Going Deeper with Convolutions.” In Proceedings of the IEEE Conference on Computer Vision and Pattern Recognition, 1–9.