Fine-Tuning Decision Thresholds in Credit Risk Assessment
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Requirements Clarification & Assessment
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).
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.
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.
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.
Current Model Assessment:
Evaluate the current model's performance and decision threshold.
Analyze the impact of current thresholds on financial outcomes.