The ROC curve is useful for assessing the predictive power of risk models and is relatively well known for this purpose in the credit scoring community. The ROC curve is a component of the Theory of Signal Detection (TSD), a theory which has pervasive links to many issues in model building. However, these conceptual links and their associated insights and techniques are less well known than they deserve to be among credit scoring practitioners.
The purpose of this paper is to alert credit risk modelers to the relationships between TSD and common scorecard development concepts and to provide a toolbox of simple techniques and interpretations.