« Structural unemployment in black and white | Main | Know your data 7: they are watching you »

Comments

Feed You can follow this conversation by subscribing to the comment feed for this post.

Krish

I am not sure I follow the adverse selection in credit cards marketing statement. That the lowest rates would attract the worst customers because no other bank is willing to offer cards at that rate.

So, let us do a small thought experiment here. Say, credit card companies operate at rates between 15 and 25%. Also, there are exactly two customers in the market-place; one who is desperate for credit and the other who is trying to get the best rate for their balances. (The dealseekers, if you will.) If a competitor drops price to 10%, the one who is desperate for credit will apply but then so will the deal-seeker. If the competition increases price to 30%, the one who is desperate will still apply but the deal-seeker won't. So from a selection standpoint, the company at 30% is actually getting the worst customers as only the ones who are desperate (and therefore likely to default) apply. That is when you get adverse selection. Not when you compete on price. When you lower price, you are getting good selection but you are hurting your margins.

Kaiser

Krish: Here's how to think about it. There are two banks in the market, A and B. Bank A is conservative while bank B is a risk-taker. Now enter an individual who has a poor credit score. Let's say bank B is willing to give credit to this customer at a 30% interest rate. However, bank A, the conservative one, has a strict credit score cutoff, meaning it will reject applicants like him. So he will get credit from bank B. The "adverse" part of adverse selection says that bank B has (perhaps inadvertently) selected the lowest slither of customers in the market.

Free FICO Credit Score

Groupon doesn't have a problem as far as I can see, they have enough cash flow to keep themselves a float. Worst case scenario they probably have what 10 million emails with a high open rate? Sounds pretty good to me.

Verify your Comment

Previewing your Comment

This is only a preview. Your comment has not yet been posted.

Working...
Your comment could not be posted. Error type:
Your comment has been posted. Post another comment

The letters and numbers you entered did not match the image. Please try again.

As a final step before posting your comment, enter the letters and numbers you see in the image below. This prevents automated programs from posting comments.

Having trouble reading this image? View an alternate.

Working...

Post a comment

Marketing and advertising analytics expert. Author and Speaker. Currently at Vimeo and NYU. See my full bio.

Next Events

Aug: 20 DataViz New York Meetup

Aug: 26 Optimizely Experience, Invited Expert, New York

Past Events

See here

Junk Charts Blog



Link to junkcharts

Graphics design by Amanda Lee

Search3

  • only in Big Data

Community