7.7 ACCOUNTING FOR UNEQUAL ERROR COSTS
Now, the intrinsic assumption in Model 1 was that the two types of classification errors, false positive and false negative, are equally costly. But, as a clothing retailer, with millions of dollars potentially at stake, we need to ask ourselves, is this assumption valid? Let us investigate, by positing some costs associated with the various contingencies. These are shown in Table 7.5.
TABLE 7.5 Cost matrix for the retailer
Predicted Category | |||
0 | 1 | ||
Actual category | 0 | CostTN = $0 | CostFP = $10 |
1 | CostFN = $0 | CostTP = − $40 |
The rationale for these costs is as follows:
- True Negative. This represents a nonresponder being correctly classified as a nonresponder. The retailer will not go to the trouble of contacting this customer, who would not have responded if contacted. No money lost or gained. CostTN = $0.
- False Positive. This represents a nonresponder being incorrectly classified as a responder. This is not a very...