Fine-Tuning Decision Thresholds in Credit Risk Assessment

Requirements Clarification & Assessment

1. Understanding the Objective:

   • The primary goal is to minimize the total financial loss. This requires a deep understanding of what constitutes financial loss in the context of credit risk.
   • Financial loss can be due to defaults (false negatives) or missed opportunities (false positives).

2. Data Exploration:

   • Examine the historical credit data to understand the patterns of defaults and successful repayments.
   • Identify key features that influence credit risk and their impact on financial outcomes.

3. Stakeholder Inputs:

   • Engage with business stakeholders to determine acceptable risk levels and financial loss thresholds.
   • Understand regulatory requirements and compliance standards that may affect threshold decisions.

4. Model Performance Metrics:

   • Determine the relevant performance metrics (e.g., precision, recall, F1-score, ROC-AUC) that align with minimizing financial loss.
   • Consider the cost implications of false positives and false negatives.

5. Current Model Assessment:

   • Evaluate the current model's performance and decision threshold.
   • Analyze the impact of current thresholds on financial outcomes.