Predicting whether people will repay their loans or default on them is important to a bank that sells such loans. Should the bank predict the default probability for applicants? Or, rather, should it classify applicants into prospective defaulters and prospective repayers? And how are the two kinds of predictions related? In particular, can the bank use probability predictions to classify applicants into defaulters and repayers, in a way that takes into account the bank’s costs when a default happens and its costs when it forgoes a good applicant?
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