Scoring Decisions in the Context of Economic Uncertainty

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...

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Bibliographic Details
Published in:The Journal of the Operational Research Society 2010-03, Vol.61 (3), p.421-429
Main Authors: Rajaratnam, K., Beling, P., Overstreet, G.
Format: Article
Language:English
Subjects:
Applied sciences
Banking
Business and Management
Consumer credit
Credit risk
Credit scores
Credit scoring
Customers
Decision making
Delinquency
Economic conditions
Economic forecasting
Economic models
Economic profit
Economic uncertainty
Exact sciences and technology
Investment risk
Management
Market shares
Operational research and scientific management
Operational research. Management science
Operations research
Operations Research/Decision Theory
Part 1: Consumer Credit Risk Modelling
Part I: Consumer Credit Risk Modeling
Portfolio theory
Profits
Risk theory. Actuarial science
Studies
Survival analysis
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Summary: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.
ISSN:0160-5682
1476-9360
DOI:10.1057/jors.2009.99