News Column

Investigators at University of Southampton Discuss Findings in Operations Science (Credit card pricing and impact of adverse selection)

August 22, 2014

By a News Reporter-Staff News Editor at Science Letter -- A new study on Science is now available. According to news originating from Southampton, United Kingdom, by NewsRx correspondents, research stated, "Variable pricing is one way of improving the profitability of credit cards when the price is the interest rate to be charged. However, choosing the appropriate price for each risk grade of default is not straightforward, as one of the main problems is adverse selection, when the lender finds that the borrowers who actually take a specific offer have a higher default rate than expected."

Our news journalists obtained a quote from the research from the University of Southampton, "We show that modelling the choice of credit card by the borrower as an auction process means that the winner's curse can lead to adverse selection. By modelling the way lenders use the credit score of a borrower in their pricing decision we are able to show that there is a simple relationship between the actual probability of a borrower repaying and what the successful lender believes this probability to be, regardless of the distribution of the errors caused by adverse selection."

According to the news editors, the research concluded: "This allows one to assess the impact on profitability of these errors."

For more information on this research see: Credit card pricing and impact of adverse selection. Journal of the Operational Research Society, 2014;65(8):1193-1201. Journal of the Operational Research Society can be contacted at: Palgrave Macmillan Ltd, Brunel Rd Bldg, Houndmills, Basingstoke RG21 6XS, Hants, England (see also Science).

The news correspondents report that additional information may be obtained from B. Huang, University of Southampton, Southampton SO17 1BJ, Hants, United Kingdom.

Keywords for this news article include: Europe, Science, Southampton, United Kingdom

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Source: Science Letter

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