Reject Inference Technique
Predictive models are used to form a “credit score” that determines the probability of an application being good/bad at a future date. Different types of models are used in this context, the most common being the Regression Formulae, here, y is our target variable, that is, whether the loan would be good or bad. The representation could be through a dummy variable, probability unit or logistic unit. X’s are the variables that the model considers to reach the decision. Each of these X’s has a corresponding score that gets activated when the variable attached to it is activated. The regression coefficients determine the weightage of the respective variables, that is, factor by which the respective score attached to that variable would be weighted. Example, As discussed, there are different techniques to form the models. Broadly, they can be classified into 2, 1. Parametric techniques: This includes, discriminant analysis, linear probability modelling and logistic regression. These t