≡ Menu

A reader asks about scorecards and why people use them


A reader sent me an interesting question after watching the ILOG seminar on scorecards and rules in which I participated earlier this week (recording of this rules and scorecards seminar is available). Here’s a summary of what he said:

One immediate comment I would have is that scorecarding seems to insert an extra unnecessary step. Rather than have an extra level of modeling and human intervention, you can directly include data and knowledge and the framework basically generates the model for you in such a way that it guarantees that the information content of the model is equal to the information content of the inputs. Scorecarding represents an opportunity for either loss of useful information, or addition of artificial information. Depending on how you assign attribute score values and how that is then mapped to probabilities, the scorecard would almost certainly have a different information content from the original inputs. That’s important, because the value of decisions is a function of this information about the future. If your model of the future is bogus, so is the value, and you certainly stand to lose value one way or another.
There’s more on this topic here: Scorecards and Shareholder Value.

I think Dave makes some good points in his post, though I think the ability of scorecards and decision rules to be validated by regulators is not one that should be underestimated. Hopefully some of my readers will post some comments here or there and we can get a debate going.

Disclosure: I am an advisor to Provisdom.


Comments on this entry are closed.

  • Dave Dixon August 14, 2008, 8:31 am

    Hi James. One quick question on regulation: did regulations on credit scoring get put in place before or after the development of credit score models?

    • James Taylor August 14, 2008, 8:35 am

      The regulations were certainly in place before credit scoring became widespread but I don’t know the dates specifically. The regulations are not scorecard specific though, you have to conform to them even if you don’t use scorecards.

  • Dave Dixon August 14, 2008, 12:00 pm

    If regulations are not in terms of credit score, then I’m not sure I understand why the scorecard makes for easier validation by regulators. We can still include business rules as part of the decision model. In fact, they may be more transparent, because they can be expressed in terms of relevant “real world” quantities/variables/decisions that regulators may be familiar with, rather than wrapping this up as a “score”.

    • James Taylor August 14, 2008, 12:02 pm

      Well the regulations say things like “increasing age must not be used to penalize borrowers” or “if something improves your odds as it increases in one range it cannot be used to penalize you beyond that range”… Clearly some of them relate to score cards but they are also general purpose regulation.