An Analytic Model for Credit Analysis

Credit decisions generally are based on judgments about the applicant derived from a report about a set of applicant attributes. Credit management does not directly observe applicant attributes. Instead the applicant provides a report of the relevant attribute set in the credit application. Unfortunately, those reports are not always perfectly reliable. In addition, attempts to clarify the reports are also not perfectly reliable. As a result, this chapter extends the credit model to include reliability. Reliability is introduced by distinguishing between the report and the actual attribute information. It is found that credit decisions can be quite sensitive to changes in reliability. Some important properties ofthe model, including mono tonicity are explored in some detail. In addition, the analytic model is compared to some heuristics. As a result of the critical point nature of the problem, it is found that the heuristics may provide misleading recommendations. ""