Premium Essay

Advantages Of Reject Inference

Submitted By
Words 2717
Pages 11
Reject inference applied to large data sets

Customer Inserts His/Her Name

Customer Inserts Grade Course
Customer Inserts Tutor’s Name
Writer Inserts Date Here (Day, Month, Year)

Reject inference applied to large data sets Introduction One of the most common use of reject inference technique is negotiation and application scoring. When prospective customers approaches a bank for a loan, it is important to evaluate their credit worthiness or rather if they are likely to default on the loan. Therefore, appropriate models are usually applied, which are pegged upon the bank’s previous performance, and on discovering the fundamental characteristics that could be useful in establishing the prospects of new customers. Apparently,
…show more content…
The extent to which the reject inference basic statistical assumptions are fulfilled is also an important determinant of the reject inference benefit. An example of portfolios where few applications are rejected include mortgages, in which case the reject inference may have no significance because, compared with the entire population, the rejected application’s sub-population is very small and hence the bias as a result of the missing data from the rejected is inconsequential. Nevertheless, the loans for small businesses, which exhibit very high risk may have over 50% reject rate while the bias due to screening is too high that it cannot be ignored. It has, however, not been known which circumstances under systematic screening should not be ignored for the purpose of parameter estimation. In addition, since the bias is data contingent, establishing the basic principle is very …show more content…
…………………………………….(4) The extent to which the lending officials use observable applicant characteristics is represented by the coefficients of y. On the other hand, the extent to which, lending officials methodically select applicants using the unobservable variables is represented by the correlation of p. Since the selection equation is fully observed, it is possible to estimate it separately all the time. According to Meng and Schmidt (1985), this will not be efficient unless p = 0. Likewise, when p is not equal to zero, a logic method or standard probit, used in the default equation provides a set of coefficients that are biased. As such, p serves to correct the systematic sample selection and possible unobserved bias that is probable in the default equation separate estimation (Boyes et al. 1989). The cost of partial observability in the model, according to Meng and Schmidt (1985), was shown to be fairly high, which also suggest that if possible, it can be essential to correct additional information. In the field of credit scoring, this means that it is not safe to assume, in the first instance, that p = 0. Alternatively, a better way can be sought in an early development phase used to judge the cost of incomplete observability. However, without referring to a certain set of data, it is not possible to quantify the efficiency loss (Poirier, 1980). As such, a careful way of doing it is through the application of the bivariate probit model in the first

Similar Documents

Free Essay

Psyc3001 Topic 6

...What inferential procedure should follow a significant ANOVA test? When ANOVA F test is significant, and have rejected homogeneity hypothesis, what should happen next is to make inferences regarding hypotheses implied by homogeneity hypothesis  make confident inferences for contrasts (and comparisons). The ANOVA F Simultaneous Test Procedure (Scheffé method) An overall test (a test of the homogeneity of population means) can be used as the basis for a simultaneous test procedure (STP), allowing for tests on all hypotheses implied by the homogeneity hypothesis (including contrasts)   1 UNSW PSYC3001 Research Methods 3 ‐ Topic 6 Lecture Slides    Dr Melanie Gleitzman  The critical value for the F STP is the ANOVA Fc: Fc = F; 1, 2 , where 1 = J – 1, 2 = N – J = J(n – 1) The decision rule for the ANOVA F test can be written as: Reject H0 : 1  2    J if F MSB F  ; 1, 2 MSE ie Rearranging we get, ie SSB  F ;1 , 2  1  MSE SSB > 1  F; 1, 2  MSE (1)   2 UNSW PSYC3001 Research Methods 3 ‐ Topic 6 Lecture Slides    Dr Melanie Gleitzman  We can use the RHS of (1) as the basis for a decision rule, allowing for a test of any contrast null hypothesis, H0:  = 0 (implied by the homogeneity hypothesis). ˆ We substitute SS ( ) for SSB in (1), giving the decision rule: Reject H0:  = 0, if ˆ SS     1  F ;1 , 2  MSE (2) The RHS of (2) is the critical sum of squares (SSc) for tests of all contrast null hypotheses in the analysis, For......

Words: 3651 - Pages: 15

Premium Essay

Significance Testing

...Chapter 11: Testing a Claim Objectives: Students will: Explain the logic of significance testing. List and explain the differences between a null hypothesis and an alternative hypothesis. Discuss the meaning of statistical significance. Use the Inference Toolbox to conduct a large sample test for a population mean. Compare two-sided significance tests and confidence intervals when doing inference. Differentiate between statistical and practical “significance.” Explain, and distinguish between, two types of errors in hypothesis testing. Define and discuss the power of a test. AP Outline Fit: IV. Statistical Inference: Estimating population parameters and testing hypotheses (30%–40%) B. Tests of significance 1. Logic of significance testing, null and alternative hypotheses; P-values; one- and two-sided tests; concepts of Type I and Type II errors; concept of power 4. Test for a mean (large sample -- ( known) What you will learn: A. Significance Tests for µ (( known) 1. State the null and alternative hypotheses in a testing situation when the parameter in question is a population mean µ. 2. Explain in nontechnical language the meaning of the P-value when you are given the numerical value of P for a test. 3. Calculate the one-sample z-statistic and the P-value for both one-sided and two-sided tests about the mean µ of a Normal population. 4. Assess statistical significance at standard levels α by......

Words: 2804 - Pages: 12

Premium Essay


...Statistical Analysis: CCResort Statistical Analysis: CCResort Student iD: z3465316 Student iD: z3465316 Business analytics department Nick Fabrio Business analytics department Nick Fabrio 2013 2013 Executive Summary: The following report was prepared by the Business Analytics Department (BAD) to assist with market research. BAD have assessed whether CCResort have positioned themselves as an “upmarket” complex with the ability to appeal to families. In order to assess the outcome of the business plan, BAD have focused on researching the type of customer that is attracted to CCResort, as well as how much they are spending over and above their accommodation costs, in addition to evaluating whether specific key performance indicators have been met. Approach: The Business Analytics Department used the following statistical tools to examine CCResort: 1. Descriptive Statistics (Mean, Mode, Range, Median, Skewness and graphical interpretations) 2. Correlation 3. Confidence Intervals 4. Hypothesis Testing Significant Findings: * CCResort typically hosts families in a higher income bracket over $100,000 (69% of guests) * Guests stay seven nights on average between 44.07% and 57.93% of the time with a 95% certainty. * Expenditure for each guest on a daily basis is between $227.61 and $240.95 on average with a 95% degree of accuracy. * Of all bookings, a significant majority of guests stay for either 2......

Words: 2041 - Pages: 9

Free Essay

The Murders in Rue Morgue

...What song the Syrens sang, or what name Achilles assumed when he hid himself among women, although puzzling questions, are not beyond all conjecture. -- Sir Thomas Browne. THE mental features discoursed of as the analytical, are, in themselves, but little susceptible of analysis. We appreciate them only in their effects. We know of them, among other things, that they are always to their possessor, when inordinately possessed, a source of the liveliest enjoyment. As the strong man exults in his physical ability, delighting in such exercises as call his muscles into action, so glories the analyst in that moral activity which disentangles. He derives pleasure from even the most trivial occupations bringing his talents into play. He is fond of enigmas , of conundrums , of hieroglyphics; exhibiting in his solutions of each a degree of acumen which appears to the ordinary apprehension preternatural. His results, brought about by the very soul and essence of method, have, in truth, the whole air of intuition. The faculty of re-solution is possibly much invigorated by mathematical study, and especially by that highest branch of it which, unjustly, and merely on account of its retrograde operations, has been called, as if par excellence, analysis. Yet to calculate is not in itself to analyze. A chess-player, for example, does the one without effort at the other. It follows that the game of chess, in its effects upon mental character, is greatly misunderstood. I am not now writing......

Words: 1310 - Pages: 6

Premium Essay

Parametric and Non-Parametric Statistics Use in Research Methods

...NAIROBI COLLEGE OF EDUCATION AND EXTERNAL STUDIES SCHOOL OF CONTINUING AND DISTANCE EDUCATION DEPARTMENT OF EXTRA-MURAL STUDIES. NYERI EXTRAMURAL CENTRE MASTER IN PROJECT PLANNING AND MANAGEMENT COURSE: LDP 603: RESEARCH METHODS ASSIGNMENT STUDENT; GITHUNDI BEDAN. ADMISSION REF-27086/2013 LECTURER; Dr. Lilian Otieno, Resident Lecturer I am tasked to distinguish between parametric and non-parametric statistics and explain when to use each method in analysis of data. I shall first seek to define what parametric and non-parametric statistics mean and then compare and contrast them in the analysis of data. Parametric statistics is a branch of statistics that assumes that the data has come from a type of probability distribution and makes inferences about the parameters of the distribution. Most well-known elementary statistical methods are parametric. (According to Wikipedia, the online dictionary). In statistical analysis, parametric significance tests are only valid if certain assumptions are met. If they are not, nonparametric tests can be used. A parameter is a measure of an entire population, such as the mean height of every man in London. In statistical analysis, one practically never has measurements from a whole population and has to infer the characteristics of the population from a sample. Generally speaking parametric methods make more assumptions than non-parametric methods. If those extra assumptions are correct, parametric methods can produce more accurate......

Words: 3625 - Pages: 15

Free Essay

Term Paper

...Forest Science Knowledge and Technology Communication Barriers to Applying Federal Research in Support of Land Management in the United States Vita Wright1 Abstract Barriers to effective communication between researchers and managers can ultimately result in barriers to the application of scientific knowledge and technology for land management. Both individual and organizational barriers are important in terms of how they affect the first three stages of the innovation-decision process: (1) knowledge, where an individual is exposed to innovation and develops an understanding of how it works; (2) evaluation, where an individual evaluates advantages and disadvantages and forms a favorable or unfavorable attitude toward innovation; and (3) decision, where an individual engages in activities that lead to a choice to either adopt or reject the innovation. Communication studies provides insight into potential influences to the communication and use of research results by federal land managers. Effective communication refers to the development of a common understanding between the research communicator and the manager or practitioner about both the existence and utility of an innovation. Communication research reveals that people frequently report leaving the same encounter with different perceptions of that encounter. So, it is not surprising that a scientist presents results in what they perceive to be clear terms and then the land manager returns to their daily tasks with......

Words: 4239 - Pages: 17

Premium Essay

Marriott Wacc Case Study

...arriott Corporation: The Cost of Capital (Abridged) Executive Summary: The case "Marriott Corporation: The Cost of Capital (Abridged)" focuses on an ideal opportunity to review the capital asset pricing model and the weighted average cost of capital through calculation of the cost of capital for Marriott as a whole. Dan Cohrs is faced with making recommendations for the hurdle rates at Marriott Corporation and its three divisions utilizing CAPM and WACC. This case illustrates how to calculate beta based on comparable companies and to lever betas to adjust for capital structure; the appropriate risk-less rate and market risk premium; the choice of time period to estimate expected returns and the difference between the geometric and the arithmetic average as a measure of expected returns. SYNOPSIS Marriott Corporation began in 1927, and over the next 60 years, the company grew into one of the leading lodging and food service companies in the US. In 1987, the Marriott's annual report stated, "We intend to remain a premier growth company. Our goal is to be the preferred employer and provider, and the most profitable company". Marriott's profits were $223 million on sales of $6.5 billion. In April 1988, vice president of project finance at the Marriott Corporation, Dan Cohrs, must prepare annual recommendations for the hurdle rates at each of the firm's three divisions, including restaurant, lodging, and contract services, as well as...

Words: 2535 - Pages: 11

Premium Essay


...they look to explain what the relationship between psychology and Christianity ought to be. The Allies model, which is discussed in more depth, holds the view that truth is found in God’s Words and Works and that God is sovereign over all things. Integration Paper The integration of psychology and Christianity has been a topic of discussion for many years and will be for many more years to come. It is important that this discussion is not put aside but rather be openly discussed among members from both disciplines. There are many models within integration and they all offer their own perspectives on the relationship between psychology and Christianity. One is not necessarily better than the other because they all present their own advantages and limitations. It is up for an individual to decide which model they will adhere to. Both psychology and theology can only accomplish so much on their own. One must have the other. Integration is important because it presents a more holistic picture of human behavior while the Allies model of integration suggests that...

Words: 5610 - Pages: 23

Premium Essay

Monetary Economy

...1. Introduction Money demand is an important element in macroeconomic analysis especially in constructing monetary policy. The demand of money is the quantities of money that people willing and able to hold at alternative interest rates, ceteris paribus. There are several models of money demand used to explain why individuals and businesses hold money balances like cash and checkable deposits. Those models of money demand shows how do the behavior of individuals and businesses causes the fluctuations of money balances in the economy. According to the liquidity preference theory by economist, John Maynard Keynes, he determined that there are three primary motives that people holding money.The first motive is transaction motive which explained that people holding money and used it to buying things. In this motive, money demand depends on size of income, spending habit and slightly affected by interest rate. The second motive for holding money is for precautionary motive which means that people hold money in anticipation of wishing to make huge transactions in the future. People will keep money on hand just in case to overcome unforeseen emergency. The demand of money in order for precautionary motive is depend on size of income, nature of person and farsightedness. The last is speculative motive which people will like to keep money in the liquid form and invested in securities when the interest rate are rises thus it can be said that hold wealth as money to store value. This......

Words: 3160 - Pages: 13

Premium Essay

Computer Addiction

...conclusion. The limit on our ability to understand ourselves, or grasp all that affects us in our environment described in that Treatise is such that it leaves open the possibility that we may never be able to determine fully, or control effectively, the structure and outcome of our relationships with each other. In effect, the Treatise suggests that we may not have the faculties or abilities required to eliminate difference between individuals within our societies. In sum, the first founding book of the Society, the 'Foundations', rejects difference between individuals as an inherent or natural condition of human society while accepting that it may nevertheless be unavoidable. However, 'Foundations' does not then go on to discuss the question raised by that conclusion, i.e. that of the attitude of the Society toward that aspect of our social order where it exists. That issue is examined in this Essay. It is best to begin the discussion by repeating the inference drawn from the Axioms, Dogma and Principles in the Treatise on the Individual. Acceptance of the Axioms and choice...

Words: 1715 - Pages: 7

Premium Essay

Statistics Cheat Sheet

...observations. Proportion and percentages (aka relative frequencies) Probability- the chance that an even will occur. Sample- a subset of the population. Random Samples are most valid. Design- Plan for how the data will be collected. Two events are dependent if the outcome or occurrence of the first affects the outcome or occurrence of the second so that the probability is changed. Sample Space- set of all possible outcomes for a random phenomenon Variables (COLUMNS)- characteristics or measurements on the subject. Event-subset of the sample space Description- summarizing the data that are obtained. Descriptive Statistics- methods for summarizing the data. Usually consists of bar graphs and numbers like averages and %’s. Inference- Making conclusions (predictions) about the population based on the data collected (Inferential Statistics). Observation (ROW)- subject Categorical Data- defines categories for subjects (groups) uses frequencies {counts}, percent’s and frequency tables. Quantitative Data- numerical data (ex. Pulse rate) Ordinal Data- ordered categories...

Words: 12484 - Pages: 50

Free Essay


...PERCENTAGES: THE MOST USEFUL STATISTICS EVER INVENTED Thomas R. Knapp © 2010 "Eighty percent of success is showing up." - Woody Allen “Baseball is ninety percent mental and the other half is physical.” - Yogi Berra "Genius is one percent inspiration and ninety-nine percent perspiration." - Thomas Edison Preface You know what a percentage is. 2 out of 4 is 50%. 3 is 25% of 12. Etc. But do you know enough about percentages? Is a percentage the same thing as a fraction or a proportion? Should we take the difference between two percentages or their ratio? If their ratio, which percentage goes in the numerator and which goes in the denominator? Does it matter? What do we mean by something being statistically significant at the 5% level? What is a 95% confidence interval? Those questions, and much more, are what this book is all about. In his fine article regarding nominal and ordinal bivariate statistics, Buchanan (1974) provided several criteria for a good statistic, and concluded: “The percentage is the most useful statistic ever invented…” (p. 629). I agree, and thus my choice for the title of this book. In the ten chapters that follow, I hope to convince you of the defensibility of that claim. The first chapter is on basic concepts (what a percentage is, how it differs from a fraction and a proportion, what sorts of percentage calculations are useful in......

Words: 24786 - Pages: 100

Premium Essay

Slice of Life

...Slice of Life A Synthesis Paper on Philosophy and Logic Jonn Denzel V. Ramos BSGE-1E Does God exist? How to build an attractive city? Does life is real or just an imagination? An average person fails to answer these questions objectively, but philosophers have this will on solving these problems. Philosophy and logic are the fundamentals in search for meaning. Philosophers have these skill set which makes them think different from others, which leads and guides them to real and unbiased answer, it is a slice of life where they embrace every single moment they put up time and effort in their search for answer. Long time ago, Ancient Greeks invented philosophy as the way of thinking and asking questions about all things through its ultimate causes. Pre-Socratic Pythagoras coined the word philosophia which means “love of wisdom” or people who are faithful to wisdom as St. Thomas Aquinas called as wise man. Philosophy began to spread throughout the rest of the world, as the knowledge and discipline that engages and sharpens our reasons. There are three components of philosophy, the material object, formal object and natural scope. The material object refers to the subject being observed and finding the root cause on how it exist is its formal object. The natural scope is simply defined as natural reason which philosophers use in search for explanations. Ordinary and profound are two types of knowledge in philosophy. Ordinary knowledge is the foundation or the simplest......

Words: 2734 - Pages: 11

Premium Essay

Determinants of Capital Market

...DETERMINANTS OF CAPITAL STRUCTURE Introduction Modern theory of capital structure instigated with the seminal paper of Modigliani and Miller [1]. In brief, the MM theory states that the market value of a firm is determined by its earning power and the risk of its underlying assets, and is independent from its corporate financing decisions. In fact, the MM theory provided conditions under which a firm’s financial decisions do not affect the value of the firm. The fundamental conditions under which a firm’s leverage becomes irrelevant to its market value, hence the MM proposition hold includes: * No taxation * No transaction costs exist * No default risk * Perfect and frictionless markets * Firms and investors can borrow at the same interest rate The MM theorem might seem extraneous but it provides cornerstone for corporate finance. However, the classic question “How do firms choose their capital structure?” remain unanswered. In finance, the term ‘capital structure’ refers to the technique followed by corporations to  finance its assets through combination of equity, debt, or hybrid securities [2]. In simple terms, a firm's capital structure is the symphony of its liabilities. For example, a firm that possesses $40 billion in equity and $60 billion in debt is said to be 40% equity-financed and 60% debt-financed. The firm's ratio of debt to equity that is 60% is referred to as the ‘firm's leverage’. Leverage and Gearing are two terms that are often......

Words: 1172 - Pages: 5

Free Essay


...Chapter 5 – Social Cognition Debate: Faith and Social Cognition * Carolyn Briggs: involved in and then rejected. Christian fundamentalism. How can someone believe so intensely and then reject those same beliefs? How are our beleifs shaped by those around us? Consider some cognitive biases and errors you have made. **Social cognition: Study of how people think about people and social relationships. -What is unique about thinking about people as opposed to thinking about something else, like frogs or computers? Why is it important to study how people think about people? -How is argumentative thinking helpful? Why would arguing with others help with human survival? **Thinking Cognitive Miser: Exemplified by having errors in thinking. Reluctance to do much extra thinking. -During free time, why do most people choose to think about a subject such as baseball, but not about a subject such as calculus? **Automatic and deliberate thinking How does the Stroop Effect (colors and words) illustrate automatic versus deliberate thought? How do we know if a thought is automatic? -Requires no awareness -not guided by intention -not subject to deliberate control -effort is low Schemas: information about a concept. Ex/Schema for exams = involves multi paged paper and #2 pencil. Scripts: Schemas about certain events. How an experience and an event will play out. Ex/ For exam… come into class, cram before instructor says put materials away, administered exam...

Words: 950 - Pages: 4