A local bank reviewed its credit card policy with the intention of recalling some of its credit cards. In the past approximately 5% of cardholders defaulted, leaving the bank unable to collect the outstanding balance. Hence, management established a prior probability of .05 that any particular cardholder will default. The bank also found that the probability of missing a monthly payment is .20 for customers who do not default. Of course, the probability of missing a monthly payment for those who default is 1.
a. Given that a customer missed one or more monthly payments, compute the posterior probability that the customer will default.
b. The bank would like to recall its card if the probability that a customer will default is greater than .20. Should the bank recall its card if the customer misses a monthly payment? Why or why not?

  • CreatedSeptember 20, 2015
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