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Here's How Amazon Decides What You're Going to Buy

The company has to navigate a key challenge in sorting through the enormous amounts of data available.

Many people complain about targeted ads but few actually know how everything from their clicking habits to current market performance inform what the algorithm will show them next time.

In the first quarter of 2022 e-commerce giant Amazon AMZN increased its spending on online ads by 25% to $7.8 billion.

In economics, there is a concept known as nowcasting — it moved over from meteorology and refers to making very short-term predictions (usually within the range of three to five hours.)

For retailers, this often means predicting what a given customer will buy based on both broad factors such as how given stocks are doing to more specific information about what somebody scrolled through in the last few hours. 

What you bought a month ago, after all, may say very little about what you need today.

How Is 'Nowcasting' Used At Amazon?

"When COVID arrived, it became clear that understanding macroeconomic trends was more important than ever,” Amazon's Senior Principal Economist Domenico Giannone said in a company blog interview.

Giannone, who comes from Italy and previously worked at New York's Federal Reserve Bank before joining Amazon in 2019, works on interpreting long-term sales data as it changes during particular seasons and periods.

"Handling big data and high dimensional models is trying to understand what is the right scale of the map that allows you to get the information you need without getting lost in details," Giannone told Amazon in the interview. "And there are statistical methods that allow us to essentially handle the trade-off between complexity and uncertainty."

The retail giant uses machine learning, or a type of artificial intelligence that routinely makes predictions without individuals asking for specific information, to aggregate purchasing powers and have what one is most likely to want to buy come up in the recommendations.

"Forecasting is very important to make sure that our customers get what they want in the fastest possible way," he said.

What Else Has Been Happening At Amazon Lately?

The biggest recent news to come out of Amazon came when, at the start of August, the retail giant announced its plans to acquire Roomba vacuum cleaner maker iRobot for $1.7 billion.

This acquisition would be the fourth biggest in Amazon's history after the purchase of health food store chain Whole Foods for $13.7 billion in 2017 and film studio MGM for $8.45 billion in 2021.

The smart appliance market continues to grow rapidly, with some forecasts saying it could reach $135 billion by 2025.