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Data Interview Question

Fine-Tuning Decision Thresholds in Credit Risk Assessment

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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.