Over years of blogging, one of our most popular ever blog posts was about the Gini coefficient. In this series of posts, we revisit the Gini and dig further into its uses and the ways we see it misused in credit scoring.
What is a GINI?
For lenders around the world, the “Gini Coefficient” is an often heard, sometimes feared, and frequently misunderstood statistical measure. Commonly used to assess things like wealth inequality, Gini Coefficients are also used to evaluate the predictive power of credit scoring models. In other words, a Gini Coefficient can help measure how good a credit score is at predicting who will repay and who will default on a loan: the better a credit score, the better it should be at giving lower scores to riskier applicants, and higher scores to safer applicants.
Though calculating a Gini Coefficient is complex, understanding it is fairly simple:
A Gini Coefficient is merely a scale of predictive power from 0 to 1, and a higher Gini means more predictive power.
However, there are a few key aspects of Gini Coefficients that are not always well understood and can lead to their misuse and wrong interpretation. Over this series of blog posts we’ll discuss four of them:
People often compare Ginis when they should not. The only useful comparison across Ginis (or AUCs) is when looking at different scores over the exact same data.
People forget that Gini will vary by acceptance rate. When presented with a Gini coefficient, always keep an eye on the effect of the acceptance rate.
People focus on Ginis, but are not always aware of its impact on the costs, benefits and overall economics of Credit Scoring.
People do not fully understand and often overestimate the role of Gini in the business of lending.
About the Author:
Carlos del Carpio is Director of Risk & Analytics at LenddoEFL. He has 10+ years of experience developing credit scoring models and implementing end-to-end credit risk solutions for Banks, Retailers, and Microfinance Institutions across 27+ countries in Latin America, Asia and Africa.
LenddoEFL’s mission is to provide one billion people access to powerful financial products at a lower cost, faster and more conveniently. We use AI and advanced analytics to bring together the best sources of digital and behavioural data to help lenders in emerging markets make data-driven decisions and confidently serve underbanked people and small businesses. To date, LenddoEFL has provided credit scoring, verification and insights products to over 50 financial institutions, serving seven million people and lending two billion USD. For inquiries about our products or services please contact us here.