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Algorithmic Fairness

Author

Listed:
  • Sanjiv Das

    (Leavey School of Business, Santa Clara University, Santa Clara, California, USA)

  • Richard Stanton

    (Haas School of Business, University of California, Berkeley, California, USA)

  • Nancy Wallace

    (Haas School of Business, University of California, Berkeley, California, USA)

Abstract

This article reviews the recent literature on algorithmic fairness, with a particular emphasis on credit scoring. We discuss human versus machine bias, bias measurement, group versus individual fairness, and a collection of fairness metrics. We then apply these metrics to the US mortgage market, analyzing Home Mortgage Disclosure Act data on mortgage applications between 2009 and 2015. We find evidence of group imbalance in the dataset for both gender and (especially) minority status, which can lead to poorer estimation/prediction for female/minority applicants. Loan applicants are handled mostly fairly across both groups and individuals, though we find that some local male (nonminority) neighbors of otherwise similar rejected female (minority) applicants were granted loans, something that warrants further study. Finally, modern machine learning techniques substantially outperform logistic regression (the industry standard), though at the cost of being substantially harder to explain to denied applicants, regulators, or the courts.

Suggested Citation

  • Sanjiv Das & Richard Stanton & Nancy Wallace, 2023. "Algorithmic Fairness," Annual Review of Financial Economics, Annual Reviews, vol. 15(1), pages 565-593, November.
    • Handle: RePEc:anr:refeco:v:15:y:2023:p:565-593
    DOI: 10.1146/annurev-financial-110921-125930
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    More about this item

    Keywords

    algorithms; machine learning; bias; fairness metrics; credit scoring;
    All these keywords.

    JEL classification:

    • C55 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Large Data Sets: Modeling and Analysis
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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