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Scoring decisions in the context of economic uncertainty

Author

Listed:
  • K Rajaratnam

    (University of Virginia)

  • P Beling

    (University of Virginia)

  • G Overstreet

    (University of Virginia)

Abstract

We consider methods for incorporating forecasts of future economic conditions into acquisition decisions for scored retail credit and loan portfolios. We suppose that a portfolio manager is faced with two possible future economic scenarios, each characterised by a known probability of occurrence and by known performance functions that give expected profit and volume. We suppose further that he must choose in advance the scoring strategy and score cutoffs to optimise performance. We show that, despite the uncertainty of performance induced by economic conditions, every efficient policy consists of a single cutoff, provided the expected profit and volume performance curves in each scenario are concave. If these curves are not concave, efficient operating points can be characterised as cutoffs on a redefined score. In cases in which two scorecards are available, we show that it may be advantageous to randomly choose the scorecard to be employed, and we provide methods for selecting efficient operating points. Discussion is limited to cases with two scorecards and two economic scenarios, but our approach and results generalise to more scorecards and more economic scenarios.

Suggested Citation

  • K Rajaratnam & P Beling & G Overstreet, 2010. "Scoring decisions in the context of economic uncertainty," Journal of the Operational Research Society, Palgrave Macmillan;The OR Society, vol. 61(3), pages 421-429, March.
    • Handle: RePEc:pal:jorsoc:v:61:y:2010:i:3:d:10.1057_jors.2009.99
    DOI: 10.1057/jors.2009.99
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    References listed on IDEAS

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    1. D. J. Hand & W. E. Henley, 1997. "Statistical Classification Methods in Consumer Credit Scoring: a Review," Journal of the Royal Statistical Society Series A, Royal Statistical Society, vol. 160(3), pages 523-541, September.
    2. H Zhu & P A Beling & G A Overstreet, 2001. "A study in the combination of two consumer credit scores," Journal of the Operational Research Society, Palgrave Macmillan;The OR Society, vol. 52(9), pages 974-980, September.
    3. Robert B. Avery & Paul S. Calem & Glenn B. Canner, 2004. "Consumer credit scoring: do situational circumstances matter?," BIS Working Papers 146, Bank for International Settlements.
    4. Thomas, L.C. & Ho, J. & Scherer, W.T., 2001. "Time will tell: Behavioural Scoring and the Dynamics of Consumer Credit Assessment," Papers 01-174, University of Southampton - Department of Accounting and Management Science.
    5. Avery, Robert B. & Calem, Paul S. & Canner, Glenn B., 2004. "Consumer credit scoring: Do situational circumstances matter?," Journal of Banking & Finance, Elsevier, vol. 28(4), pages 835-856, April.
    6. Crook, Jonathan N. & Edelman, David B. & Thomas, Lyn C., 2007. "Recent developments in consumer credit risk assessment," European Journal of Operational Research, Elsevier, vol. 183(3), pages 1447-1465, December.
    7. R M Oliver & E Wells, 2001. "Efficient frontier cutoff policies in credit portfolios," Journal of the Operational Research Society, Palgrave Macmillan;The OR Society, vol. 52(9), pages 1025-1033, September.
    8. Thomas, Lyn C., 2000. "A survey of credit and behavioural scoring: forecasting financial risk of lending to consumers," International Journal of Forecasting, Elsevier, vol. 16(2), pages 149-172.
    9. P Beling & Z Covaliu & R M Oliver, 2005. "Optimal scoring cutoff policies and efficient frontiers," Journal of the Operational Research Society, Palgrave Macmillan;The OR Society, vol. 56(9), pages 1016-1029, September.
    10. H Zhu & P A Beling & G A Overstreet, 2002. "A Bayesian framework for the combination of classifier outputs," Journal of the Operational Research Society, Palgrave Macmillan;The OR Society, vol. 53(7), pages 719-727, July.
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    Cited by:

    1. Andreea Costea, 2017. "A Quantitative Approach to Credit Risk Management in the Underwriting Process for the Retail Portfolio," Romanian Economic Journal, Department of International Business and Economics from the Academy of Economic Studies Bucharest, vol. 20(63), pages 157-186, March.
    2. Lu Gao & Kanshukan Rajaratnam & Peter Beling, 2016. "Loan origination decisions using a multinomial scorecard," Annals of Operations Research, Springer, vol. 243(1), pages 199-210, August.
    3. Kanshukan Rajaratnam & Peter Beling & George Overstreet, 2017. "Regulatory capital decisions in the Context of consumer loan portfolios," Journal of the Operational Research Society, Palgrave Macmillan;The OR Society, vol. 68(7), pages 847-858, July.

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