Cost Matrix

From Open Risk Manual

Definition

A Cost Matrix is a method for adjusting the weight assigned to misclassifications by Credit Scoring Models in particular supervised models. The cost matrix offers a means to differentiate the importance of Type I and Type II classification errors

Example

A Credit Scorecard could have a 2x2 cost matrix as follows:

Predicted performance
Goods (Accept) Bads (Reject)
Actual performance
Goods +100 -100
Bads 0 -500
In this cost matrix example, correct classification offers a +100 benefit, wrong rejection of a good credit has an opportunity cost of -100,

correct classification of a bad credit is neutral, incorrect classification of a bad credit has a loss of -500


References

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