When to rebuild or when to adjust scorecards

Ki Mun Jung, Lyn C Thomas and Mee Chi So
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Ki Mun Jung: Kyungsung University, Busan, South Korea
Lyn C Thomas: University of Southampton, Southampton, United Kingdom
Mee Chi So: University of Southampton, Southampton, United Kingdom

Journal of the Operational Research Society, 2015, vol. 66, issue 10, 1656-1668

Abstract: Data-based scorecards, such as those used in credit scoring, age with time and need to be rebuilt or readjusted. Unlike the huge literature on modelling the replacement and maintenance of equipment there have been hardly any models that deal with this problem for scorecards. This paper identifies an effective way of describing the predictive ability of the scorecard and from this describes a simple model for how its predictive ability will develop. Using a dynamic programming approach one is then able to find when it is optimal to rebuild and when to readjust a scorecard. Failing to readjust or rebuild a scorecard when they aged was one of the defects in credit scoring identified in the investigations into the sub-prime mortgage crisis.

Date: 2015
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