Failure prediction with self organizing maps

The significant growth of consumer credit has resulted in a wide range of statistical and non-statistical methods for classifying applicants in 'good' and 'bad' risk categories. Self organizing maps (SOMs) exist since decades and although they have been used in various application areas, only little research has been done to investigate their appropriateness for credit scoring. This is mainly due to the unsupervised character of the SOM's learning process. In this paper, the potential of SOMs for credit scoring is investigated. First, the powerful visualization capabilities of SOMs for exploratory data analysis are discussed. Afterwards, it is shown how a trained SOM can be used for classification and how the basic SOM-algorithm can be integrated with supervised techniques like the multi-layered perceptron. Two different methods of integration are proposed. The first technique consists of improving the predictive power of individual neurons of the SOM with the aid of supervised classifiers. The second integration method is similar to a stacking model in which the output of a supervised classifier is entered as an input variable for the SOM. Classification accuracy of both approaches is benchmarked with results reported previously. (c) 2005 Elsevier Ltd. All fights reserved.