Before making an unsecured loan to an individual a bank orders a report on the applicant's credit history. To justify making the loan, the bank must find the applicant's credit record to be satisfactory. Describe the bank's decision. What are the bank's objectives? What risk does the bank face?
What role does the credit report play? Using Precision Tree, create an influence diagram of this situation. (Hint: Your influence diagram should include chance nodes for a credit report and for eventual default. Also, Precision Tree can convert influence diagrams into decision tress and this can be helpful in checking your work. See Problem 3.26 for instructions on conversion.) Finally, be sure to specify everything (decisions, chance events, objectives) in your model clearly enough to pass the clarity test.