Recall the earlier example of assessing the risk of loan defaults. Suppose the bank€™s top managers are divided on whether to adopt the scoring system permanently. A number of top officers believe their intuitive judgment about risks is superior to an €œartificial€ score. Accordingly, the bank decides to test its judgment against the scoring system. The managers will make their own designations of loans to the four categories and see how well they can identify problem loans. Their track record over the past year is shown in the table:

a. Predict the probability of default for each loan category. (Assume the overall default rate is 10 percent: Pr(default) = .1.)
b. How do these risk assessments, based on judgment and intuition, compare with the earlier predictions based on credit scores? Which seems to provide more valuable information?Explain.

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Category A ("zero" risk) B (solid) C (uncertain) D (high risk) Total Performing Loan .25 .30 .40 05 1.00 Defaulted Loan 20 25 .45 10 1.00