Sequential three-way decision with automatic threshold learning for credit risk prediction

Machine learning algorithms treat credit risk prediction as a binary classification problem. However, two-way decisions with a single threshold force to make either a default or non-default decision may be inappropriate. To reduce the risk of decision errors, this study introduces three-way decisions and proposes a sequential three-way decision model with automatic threshold learning to evaluate credit risk. Initially, the model uses the loan amount and interest to determine the decision loss of the three-way decision, assigning distinct decision thresholds to different samples. Subsequently, the model employs decision cost and information gain to formulate an objective for threshold optimisation. Finally, the model continuously optimises the classification process by using the outcomes of certain decisions as supplementary information. In addition, to validate our model, we conduct comparative experiments with various methods on a real credit dataset from a Chinese bank. The results indicate that the model not only enhances classification performance across several metrics but also assists financial institutions in reducing decision error costs.