A comparison of Discriminant Analysis versus Artificial Neural Networks

Artificial Neural Network (ANN) techniques have recently been applied to many different fields and have demonstrated their capabilities in solving complex problems. In a business environment, the techniques have been applied to predict bond ratings and stock price performance. In these applications, ANN techniques outperformed widely-used multivariate statistical techniques. The purpose of this paper is to compare the ANN method with the Discriminant Analysis (DA) method in order to understand the merits of ANN that are responsible for the higher level of performance. The paper provides an overview of the basic concepts of ANN techniques in order to enhance the understanding of this emerging technique. The similarities and differences between ANN and DA techniques in representing their models are described. This study also proposes a method to overcome the limitations of the ANN approach. Finally, a case study using a data set in a business environment demonstrates the superiority of ANN over DA as a method of classification of observations.