A deep dive into Weight-of-Evidence (WoE)
Welcome to our deep dive into Weight-of-Evidence, variable selection, credit modelling and more. In our previous post we defined Weight-of-Evidence (WoE), described how it is used as a feature transform, and explored a simple example. In this post we describe the why. When we understand the why, we'll be able to apply WoE with more understanding, hopefully leading to better models and more informed decisions. In the previous post we defined the WoE as: $$\mbox{WoE} = \ln \left( \frac{\mbox{good distribution}}{\mbox{bad distribution}}\right).$$This makes sense for credit risk modelling because, with this definition, positive values of WoE indicate a 'good' loan. Since [...]
