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The Actuary The magazine of the Institute & Faculty of Actuaries

Statistician honoured

A statistician who cracks the patterns buried deep in banking and consumer data has been honoured with election to fellowship of the UK’s national academy of humanities and social sciences, the British Academy. David Hand, professor of statistics at Imperial College London, uses his statistical expertise to help banks fight credit card fraud and calculate credit risks, allowing them to decide whom to offer loans to.

Professor Hand was cited by the British Academy for ‘his development of statistical methods of central interest to social scientists’. Having begun his career applying statistics to problems in medicine and psychology, he now specialises in data-mining – the analysis of huge datasets of information such as online customer databases or credit card transactions, to make insights and predict trends in people’s behaviour. His consumer credit research group is the UK’s leading research group in applying statistical methods in banking.

Modelling customer behaviour and finding the so-called ‘good risks’ for mortgages, loans, or credit cards requires the analysis of vast amounts of data, and can sometimes lead to counter-intuitive findings. One of Professor Hand’s key pieces of work has been to establish strategies for dealing with ‘reject inference’ – a result of the fact that the data gathered on how people fare with repaying loans is intrinsically biased, as it contains information only about those who received a loan in the first place. ‘When you’re looking at the future, you need to base your decision using information about the bad people as much as the good – otherwise you only have half the data set. This is a fundamental problem for banks trying to decide whom they are going to give loans to in the future’, he said. ‘An ideal solution is to give the loan or product to some people who you think may actually be a bad risk, in other words to test them out. But the banks are by nature very conservative, and there is a hell of a job in persuading them that the statistics really do recommend this strategy! At the end of the day, if a bank turns someone down for a loan, that’s probably a good thing for them – they’re very likely to be overstretched. But I don’t tell banks how to run their business, I give them more information about their customers,’ he added.

David Hand was elected an honorary fellow of the Institute of Actuaries in 1999 and was awarded the Guy Medal in Silver of the Royal Statistical Society in 2002.