Structuring Risk
"Default is not one thing. It is three things: broken (can't pay), lying (won't pay), or fake (not real)."
Back in 2022 I was building a lending product. Kept approving people who vanished with our money. Kept rejecting people who would have paid us back.
Here is what I figured out. Default is not one thing. It is three things:
- Person is broke (cannot pay)
- Person is lying (will not pay)
- Person is not real (fake identity)
We were training models like these were the same problem. They are not.
Broke person needs different product design. Lying person needs better fraud detection. Fake person needs better identity verification.
So we rebuilt it. Stopped caring about credit scores. Started watching behavior.
The takeaway: Your models are only as good as your problem decomposition. When you are building anything that matters... spend more time understanding how it breaks than how it works.