Are we modelling the right thing? The impact of incorrect problem specification in credit scoring

Classification and regression models are widely used by mainstream credit granting institutions to assess the risk of customer default. In practice, the objectives used to derive model parameters and the business objectives used to assess models differ. Models parameters are determined by minimising some function or error or by maximising likelihood, but performance is assessed using global measures such as the GINI coefficient, or the misclassification rate at a specific point in the score distribution. This paper seeks to determine the impact on performance that results from having different objectives for model construction and model assessment. To do this a genetic algorithm (GA) is utilized to generate linear scoring models that directly optimise business measures of interest. The performance of the GA models is then compared to those constructed using logistic and linear regression. Empirical results show that all models perform similarly well, suggesting that modelling and business objectives are well aligned.