February 2025
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511 Reads
MIT Sloan Management Review
Machine learning is now widely used to guide decisions in processes where gauging the probability of a specific outcome-such as whether a customer will repay a loan-is sufficient. But because the technology, as traditionally applied, relies on correlations to make predictions, it offers managers no insight when it comes to understanding the impact of different choices on business outcomes. 1 Consider an R&D manager at a large company who is faced with deciding how much to invest in a new technology. Using traditional ML, they can ask what will happen when they increase their spending. They might find a strong correlation between higher levels of investment and higher revenue when the economy is growing. And they might conclude that, since economic conditions are favorable, they should increase the R&D budget. But should they, really? If so, by how much? External factors, such as levels of consumer spending, technology spillover from competitors, and interest rates, also influence revenue growth. Comparing how different levels of investment might affect revenue while considering these other variables is useful for the manager to determine an R&D budget that delivers the greatest benefit to the company. Causal ML-an emerging area of machine learning-can help to answer such what-if questions through causal inference. Similar to how marketers use A/B tests to infer which of two ads is likely to generate more sales, causal ML can inform what might happen if managers take a particular action. 2 This makes the technology useful in many of the same business functions that use traditional ML, including product development, manufacturing, finance, human resources, and marketing. 3 Traditional ML is still the go-to approach when making predictions-such as forecasting stock prices or recommending products that customers