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Preprocessing the Discrete Variables

Preprocessing the Discrete Variables

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In the lesson Data Preparation. Preprocessing Discrete Variables: Creating dummies , 
For the variable ‘addr_state’ it was explained that grouping into categories for the final model has to be done according to the WoE values keeping into the consideration of the No.of observations(Borrowers)
But , in the homework problem , when we try to preprocess the discrete variable ‘purpose’ shouldn’t we group them just as above , then into the following categories:
# small_business, educational, moving ,house
# Other
# renewable_energy, medical, wedding, vacation
# debt_conslidation
#home_improvement
#major_purchase, car
#credit_card
But the solution is given as :
# We combine ‘educational’, ‘small_business’, ‘wedding’, ‘renewable_energy’, ‘moving’, ‘house’ in one category: ‘educ__sm_b__wedd__ren_en__mov__house’.
# We combine ‘other’, ‘medical’, ‘vacation’ in one category: ‘oth__med__vacation’.
# We combine ‘major_purchase’, ‘car’, ‘home_improvement’ in one category: ‘major_purch__car__home_impr’.
# We leave ‘debt_consolidtion’ in a separate category.
# We leave ‘credit_card’ in a separate category.
Can you just explain me on what basis the above grouping is being done?

1 Answer

365 Team
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Hi venkat, 
thank you for the query and apologies for the late response! Are you still experiencing difficulties with the credit risk modeling lecture?
Thank you in advance!
Best, 
365 Eli