A major requirement for credit scoring models is to provide a maximally accurate risk prediction. Additionally, regulators demand these models to be transparent and auditable. Thus, in credit scoring, very simple predictive models such as logistic regression or decision trees are still widely used and the superior predictive power of modern machine learning algorithms cannot be fully leveraged. Significant potential is therefore missed, leading to higher reserves or more credit defaults. This article works out different dimensions that have to be considered for making credit scoring models understandable and presents a framework for making “black box” machine learning models transparent, auditable, and explainable. Following this framework, we present an overview of techniques, demonstrate how they can be applied in credit scoring and how results compare to the interpretability of scorecards. A real world case study shows that a comparable degree of interpretability can be achieved while machine learning techniques keep their ability to improve predictive power.

: Incomplete data sets with different data types are difficult to handle, but regularly to be found in practical clustering tasks. Therefore in this paper, two procedures for clustering mixed-type data with missing values are derived and analyzed in a simulation study with respect to the factors of partition, prototypes, imputed values, and cluster assignment. Both approaches are based on the k-prototypes algorithm (an extension of k-means), which is one of the most common clustering methods for mixed-type data (i.e., numerical and categorical variables). For k-means clustering of incomplete data, the k-POD algorithm recently has been proposed, which imputes the missings with values of the associated cluster center. We derive an adaptation of the latter and additionally present a cluster aggregation strategy after multiple imputation. It turns out that even a simplified and time-saving variant of the presented method can compete with multiple imputation and subsequent pooling.

Algorithmic scoring methods are widely used in the finance industry for several decades in order to prevent risk and to automate and optimize decisions. Regulatory requirements as given by the Basel Committee on Banking Supervision (BCBS) or the EU data protection regulations have led to an increasing interest and research activity on understanding black box machine learning models by means of explainable machine learning. Even though this is a step into a right direction, such methods are not able to guarantee for a fair scoring as machine learning models are not necessarily unbiased and may discriminate with respect to certain subpopulations such as a particular race, gender, or sexual orientation—even if the variable itself is not used for modeling. This is also true for white box methods like logistic regression. In this study, a framework is presented that allows analyzing and developing models with regard to fairness. The proposed methodology is based on techniques of causal inference and some of the methods can be linked to methods from explainable machine learning. A definition of counterfactual fairness is given together with an algorithm that results in a fair scoring model. The concepts are illustrated by means of a transparent simulation and a popular real-world example, the German Credit data using traditional scorecard models based on logistic regression and weight of evidence variable pre-transform. In contrast to previous studies in the field for our study, a corrected version of the data is presented and used. With the help of the simulation, the trade-off between fairness and predictive accuracy is analyzed. The results indicate that it is possible to remove unfairness without a strong performance decrease unless the correlation of the discriminative attributes on the other predictor variables in the model is not too strong. In addition, the challenge in explaining the resulting scoring model and the associated fairness implications to users is discussed.

One of the most frequently used algorithms for clustering data with both numeric and categorical variables is the k-prototypes algorithm, an extension of the well-known k-means clustering. Gower’s distance denotes another popular approach for dealing with mixed-type data and is suitable not only for numeric and categorical but also for ordinal variables. In the paper a modification of the k-prototypes algorithm to Gower’s distance is proposed that ensures convergence. This provides a tool that allows to take into account ordinal information for clustering and can also be used for large data. A simulation study demonstrates convergence, good clustering results as well as small runtimes.

Random forests are currently one of the most popular algorithms for supervised machine learning tasks. By taking into account for many trees instead of a single one the resulting forest model is no longer easy to understand and also often denoted as a black box. The paper is dedicated to the interpretability of random forest models using tree-based explanations. Two different concepts, namely most representative trees and surrogate trees are analyzed regarding both their ability to explain the model and to be understandable by humans. For this purpose explanation trees are further extended to groves, i.e. small forests of few trees. The results of an application to three real world data sets underline the inherent trade of between both requirements. Using groves allows to control for the complexity of an explanation while simultaneously analyzing their explanatory power.