Credit Scoring Model Development Experiments with Linear Programming

Debashish Sarkar
Management Sciences Group
CIT, New Jersey, USA

Abstract

Freed and Glover, Hand, and other researchers have examined LP formulations to construct a
discriminant (scoring) function that helps to separate the good applicants from the bad ones.
While the LP approach has the practical advantage of allowing the model developers to include
appropriate bias into the scorecard development, some authors (Erenguc and Koehler; Nath,
Jackson and Jones) have found that the LP approach, while competitive, is not as good as the
statistical methods. Some authors (e.g., Banasik, Crook, Thomas) advocate use of LP mostly in
re-calibrating scorecards (i.e., bias treatment). Impacts of these approaches on practical model
development metrics using actual credit data are often not found in credit literature.

In this talk we will present results of LP experiments with actual credit data. Specifically,
experiments that combine results from statistical analysis with LP will be described. Impacts of
these experiments on modeling metrics will also be presented.