Question

12.1 Personal Loan Acceptance. Universal Bank is a relatively young bank growing rapidly in terms of overall customer acquisition. The majority of these customers are liability customers with varying sizes of relationship with the bank. The customer base of asset customers is quite small, and the bank is interested in expanding this base rapidly to bring in more loan business. In particular, it wants to explore ways of converting its liability customers to personal loan customers. A campaign the bank ran for liability customers last year showed a healthy conversion rate of over 9% successes. This has encouraged the retail marketing department to devise smarter campaigns with better target marketing. The goal of our analysis is to model the previous campaign’s customer behavior to analyze what combination of factors make a customer more likely to accept a personal loan. This will serve as the basis for the design of a new campaign. The file UniversalBank.csv contains data on 5000 customers. The data include customer demographic information (e.g., age, income), the customer’s relationship with the bank (e.g., mortgage, securities account), and the customer response to the last personal loan campaign (Personal Loan). Among these 5000 customers, only 480 (= 9.6%) accepted the personal loan that was offered to them in the previous campaign. Partition the data (60% training and 40% validation) and then perform a discriminant analysis that models Personal Loan as a function of the remaining predictors (excluding zip code). Remember to turn categorical predictors with more than two categories into dummy variables first. Specify the success class as 1 (personal loan acceptance), and use the default cutoff value of 0.5.

a. Compute summary statistics for the predictors separately for loan acceptors and non-acceptors. For continuous predictors, compute the mean and standard deviation. For categorical predictors, compute the percentages. Are there predictors where the two classes differ substantially?

b. Examine the model performance on the validation set.

I. What is the accuracy rate?

II. Is one type of misclassification more likely than the other?

III. Select three customers who were misclassified as acceptors and three who were misclassified as non-acceptors. The goal is to determine why they are misclassified. First, examine their probability of being classified as acceptors: is it close to the threshold of 0.5? If not, compare their predictor values to the summary statistics of the two classes to determine why they were misclassified.

c. As in many marketing campaigns, it is more important to identify customers who will accept the offer rather than customers who will not accept it. Therefore, a good model should be especially accurate at detecting acceptors. Examine the lift chart and decile-wise lift chart for the validation set and interpret them in light of this ranking goal.

d. Compare the results from the discriminant analysis with those from a logistic regression (both with cutoff 0.5 and the same predictors). Examine the confusion matrices, the lift charts, and the decile charts. Which method performs better on your validation set in detecting the acceptors?

e. The bank is planning to continue its campaign by sending its offer to 1000 additional customers. Suppose that the cost of sending the offer is $1 and the profit from an accepted offer is $50. What is the expected profitability of this campaign?