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Fairness in Credit Scoring: Assessment, Implementation and Profit Implications

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  • Nikita Kozodoi
  • Johannes Jacob
  • Stefan Lessmann

Abstract

The rise of algorithmic decision-making has spawned much research on fair machine learning (ML). Financial institutions use ML for building risk scorecards that support a range of credit-related decisions. Yet, the literature on fair ML in credit scoring is scarce. The paper makes three contributions. First, we revisit statistical fairness criteria and examine their adequacy for credit scoring. Second, we catalog algorithmic options for incorporating fairness goals in the ML model development pipeline. Last, we empirically compare different fairness processors in a profit-oriented credit scoring context using real-world data. The empirical results substantiate the evaluation of fairness measures, identify suitable options to implement fair credit scoring, and clarify the profit-fairness trade-off in lending decisions. We find that multiple fairness criteria can be approximately satisfied at once and recommend separation as a proper criterion for measuring the fairness of a scorecard. We also find fair in-processors to deliver a good balance between profit and fairness and show that algorithmic discrimination can be reduced to a reasonable level at a relatively low cost. The codes corresponding to the paper are available on GitHub.

Suggested Citation

  • Nikita Kozodoi & Johannes Jacob & Stefan Lessmann, 2021. "Fairness in Credit Scoring: Assessment, Implementation and Profit Implications," Papers 2103.01907, arXiv.org, revised Jun 2022.
  • Handle: RePEc:arx:papers:2103.01907
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    References listed on IDEAS

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    1. Andreas Fuster & Paul Goldsmith‐Pinkham & Tarun Ramadorai & Ansgar Walther, 2022. "Predictably Unequal? The Effects of Machine Learning on Credit Markets," Journal of Finance, American Finance Association, vol. 77(1), pages 5-47, February.
    2. Verbraken, Thomas & Bravo, Cristián & Weber, Richard & Baesens, Bart, 2014. "Development and application of consumer credit scoring models using profit-based classification measures," European Journal of Operational Research, Elsevier, vol. 238(2), pages 505-513.
    3. J Banasik & J Crook & L Thomas, 2003. "Sample selection bias in credit scoring models," Journal of the Operational Research Society, Palgrave Macmillan;The OR Society, vol. 54(8), pages 822-832, August.
    4. Lessmann, Stefan & Baesens, Bart & Seow, Hsin-Vonn & Thomas, Lyn C., 2015. "Benchmarking state-of-the-art classification algorithms for credit scoring: An update of research," European Journal of Operational Research, Elsevier, vol. 247(1), pages 124-136.
    5. Somers, Mark & Whittaker, Joe, 2007. "Quantile regression for modelling distributions of profit and loss," European Journal of Operational Research, Elsevier, vol. 183(3), pages 1477-1487, December.
    6. Crook, Jonathan N. & Edelman, David B. & Thomas, Lyn C., 2007. "Recent developments in consumer credit risk assessment," European Journal of Operational Research, Elsevier, vol. 183(3), pages 1447-1465, December.
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    Citations

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    Cited by:

    1. Koen W. de Bock & Kristof Coussement & Arno De Caigny & Roman Slowiński & Bart Baesens & Robert N Boute & Tsan-Ming Choi & Dursun Delen & Mathias Kraus & Stefan Lessmann & Sebastián Maldonado & David , 2023. "Explainable AI for Operational Research: A Defining Framework, Methods, Applications, and a Research Agenda," Post-Print hal-04219546, HAL.
    2. Emmanuel Flachaire & Gilles Hacheme & Sullivan Hu'e & S'ebastien Laurent, 2022. "GAM(L)A: An econometric model for interpretable Machine Learning," Papers 2203.11691, arXiv.org.
    3. Zha, Yong & Wang, Yuting & Li, Quan & Yao, Wenying, 2022. "Credit offering strategy and dynamic pricing in the presence of consumer strategic behavior," European Journal of Operational Research, Elsevier, vol. 303(2), pages 753-766.
    4. Anna Langenberg & Shih-Chi Ma & Tatiana Ermakova & Benjamin Fabian, 2023. "Formal Group Fairness and Accuracy in Automated Decision Making," Mathematics, MDPI, vol. 11(8), pages 1-25, April.
    5. Jos'e Pombal & Andr'e F. Cruz & Jo~ao Bravo & Pedro Saleiro & M'ario A. T. Figueiredo & Pedro Bizarro, 2022. "Understanding Unfairness in Fraud Detection through Model and Data Bias Interactions," Papers 2207.06273, arXiv.org.
    6. Henry Penikas, 2023. "Unaccounted model risk for Basel IRB models deemed acceptable by conventional validation criteria," Risk Management, Palgrave Macmillan, vol. 25(4), pages 1-25, December.
    7. Jie Shi & Arno P. J. M. Siebes & Siamak Mehrkanoon, 2023. "TransCORALNet: A Two-Stream Transformer CORAL Networks for Supply Chain Credit Assessment Cold Start," Papers 2311.18749, arXiv.org.
    8. Lukas Jurgensmeier & Bernd Skiera, 2023. "Measuring Self-Preferencing on Digital Platforms," Papers 2303.14947, arXiv.org, revised Feb 2024.
    9. Dimitrios Nikolaidis & Michalis Doumpos, 2022. "Credit Scoring with Drift Adaptation Using Local Regions of Competence," SN Operations Research Forum, Springer, vol. 3(4), pages 1-28, December.
    10. Silvana M. Pesenti & Pietro Millossovich & Andreas Tsanakas, 2023. "Differential Sensitivity in Discontinuous Models," Papers 2310.06151, arXiv.org.
    11. Sullivan Hué, 2022. "GAM(L)A: An econometric model for interpretable machine learning," French Stata Users' Group Meetings 2022 19, Stata Users Group.
    12. Joseph L. Breeden & Eugenia Leonova, 2021. "Creating Unbiased Machine Learning Models by Design," JRFM, MDPI, vol. 14(11), pages 1-15, November.

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