John R. Segerstroms
al2x (pronounced "Alex") was originally intended to assist private-sector auditors (CPAs) in making recommendations to clients. It began as a rudimentary expert system with 150 rules and a 20,000-word structured vocabulary. It produced an essay-style analysis of a bank’s financial reports based on the early-warning research available at the time (Koch and Cox 1983). All methods of distinguishing one group from another are subject to two kinds of error: type 1 errors, in which a member of the target group (in this case, a future problem bank) is identified as a nonmember (a strong bank), and type 2 errors, in which a nontarget member is included in the target group. To adjust al2x to achieve low type 1 error levels, identifying a high percentage of future problem banks, it was necessary to accept the identification of a large number of strong banks as possible future problems, creating an excessive type 2 error rate. Users complained that the original al2x "cried wolf" too often to be credible. More seriously, no actionable recommendations were available because the identification of the troubled banks came too late. A typical suggestion might have been, "To help this bank, make good loans starting two years ago and continue to do so until the present." This second failing led to the withdrawal of the original model. al2x Development Corporation was formed in 1984 to identify and market a more effective bank analysis paradigm. The objective was to find the root cause of an individual bank’s abandonment of industry norms and consequent acceptance of excessively risky loans.