Presentations

1
Presentations

• For presentations Bring 3 copies of slides, two
  to turn in (4 slides per page) and one copy in
  case of computer problems (1 slide per page)
• Check website for general guidelines on
  presentations and papers
• Check website for due dates on papers.
• Bring to class for presentationsCopies of peer
  evaluation form, 6 forms, one for each
  presentation other than your own. These will be
  due each day following the presentations.

2
Scenario

• You work at a bank and need to decide whether to
  foreclose on a loan for a borrower who is
  delinquent
• Arcadia Bank has a set of records from 3
  banks1. BR bank has records of of years
  experience2. Cajun Bank has records of
  educational level3. DuPont bank has records on
  state of the economy
• NOTE Each bank has records only regarding ONE
  criteria and whether the loan was paid off or not

3
Data Notation

• The data set is a collection of successes and
  failures for loan workouts, divided into three
  categories, Y, T, C
• Notation and variablesSthe set of all
  successful loan workoutsFthe set of all failed
  workoutsYthe event that a borrower has y years
  experienceTthe event that a borrower has
  educational level tCthe event that a borrower
  has economic condition c
• NOTE The information given on each of the
  borrowers satisfies one and only one of the
  events Y, T, or C.

4
Goal

• The goal is to use all available information to
  compute the expected return on your borrowers
  loan workout
• Let Zthe random variable giving the amount of
  money that Arcadia Bank will receive from a loan
  workout
• Z can take on two values1. full value if loan
  is successful2. default value if the loan is a
  failure

5
Expected Return

• For your preliminary reports you
  calculatedE(Z)full valueP(S)default
  valueP(F)
• This was just a simple calculation and did not
  take into account the specific data on your
  borrower
• Now we can use all the tools we have learned in
  order to make a quantitative decision on whether
  to do a workout or foreclosure on your borrower
• Why do we need to make a quantitative decision?
  Address this in your project.

6
Expected Value Using Y,T,C

• E(Z)full P(SYnTnC) default P(FYnTnC)

Lets look at P(SYnTnC)
(By definition of conditional probability)
(By definition of Bayes Theorem)
7
Expected Value Using Y,T,C, cont

• But we know that

This is true because Y, T and C are independent
events, which implies that
are independent events
Since they are independent, we can multiply their
probabilities You need to explain why they are
independent.
8
Expected Value Using Y,T,C, cont

• We can closely estimate the value of

by using our database
9
E(ZYTC)

• E(ZYTC)full P(SYnTnC) default P(FYnTnC)

10
E(ZYTC), cont
So you must calculate this as part of your
decision making process. When you talk about
this calculation, do not beat the point to
death!! In other words, do not tell me step by
step what you did (i.e, multiply by this number
and add it to this number, etc.)
11
E(ZYTC), cont

• We just calculated part of our E(zYTC) value
• E(Z)full P(SYnTnC) default P(FYnTnC)
• NOTE P(SYnTnC) P(FYnTnC)1
• Why?

12
E(ZYTC)

• Just when you thought it was all over
• Now you go through the calculation again except
  this time, using Y and Y
• EX if Y4 yearsY3-5 years ( a range of
  years)Y2-6 years

13
E(ZYTC)

• Use the values of E(ZYTC), E(ZYTC), E(ZYTC) to
  make your decision
• NOTE that using Y or Y does NOT require a
  totally new calculation. Only the probabilities
  dealing with the Y change, everything else stays
  the same

14
Things to consider

• Why do we use Expected Value to make our
  decision?
• Why are Y, T and C independent?
• Where is independence used?
• Why do you use Bayes Theorem?
• Why can you use Bayes Theorem?

15
Further Analysis

• The entire project has been laid out for you
  you should now know exactly what to do so you can
  make a decision
• I want you to do some further analysis on this
  project
• Things to consider What would happen if the
  economy changed? Education level?
• Make your project be unique and stand out!