The lending of money is a risky venture. Since the year 2010, Bank of England figures indicate that lenders have been able to write off the equivalent of PS13.2 billion each year for unsound loans. You cannot be sure you’ll ever get the money you owe back.
One method of reducing this risk is to find out the most complete information you can about the person you’re lending money to. Indeed, some financial executives are currently considering the testing of personalities to determine the eligibility of those who apply for credit or loans.
Researchers from Edinburgh University’s Business School, for example, have studied models that ask borrowers to answer questions designed to determine their reliability. However, could these tests, which are already being utilized in various forms by a few companies to assess the qualifications of prospective employees, actually serve as a loan-securing tool?
The future is predicted.
The standard method to determine the probability of someone being able to be in default is to examine their spending and income in addition to their assets and commitments and then make predictions based on their financial position. We also recognize that the person’s “credit history” is important. It is important to find out if a person has been in default on loans before or has had credit issues in the past.
All of this is psychologically valid. It’s a widely-held belief that the most reliable predictor of future behavior is past behavior. How do you determine the future when the person has no or little credit background?
These are where psychological tests might be useful as well, and there’s a certain superficially attractiveness. If it is true – in which case the phrase “if” is important – the probability of someone committing default in a financial loan linked with their “personality,” and if (again) it was a measured quality, It was the case that (yet again) the rate could be calculated in a manner that was indestructible to manipulation or fraud, and if the questionnaire asked questions that were different than what is obvious (or the fake) or the bogus, then it could be an effective instrument.
Gaming the system
However, there are issues. Recently, we learned that psychological research is sound; however, it’s far from being a perfect science. To duplicate key psychological research, scientists discovered that they could prove the results only in approximately half of the research studies studied. This doesn’t mean that we should be able to trust any psychologist, but it could suggest that we need to be skeptical when we are told that a specific set of questions could help be used to predict defaulters on loans.
In fact, when looking through the questionnaires, it appears to be some interesting questions. Some of them include: “I believe others try to do the right thing,” “I believe in human goodness,” and “I pay attention to small details.” There could be connections between responses people typically give in these surveys and their fiscal health; however, the evidence must be convincing.
It is more likely that when people are seeking a loan, they’ll play the system. There’s a good likelihood that they’ll give answers they think show more trustworthiness in their credit: “I definitely pay attention to the financial information. Perhaps more prudent.” Contrast this with: “Oh, I don’t need to be concerned I just want the money.” Any psychological assessment system would need to be resistant to these playing games, perhaps by asking more ambiguous questions.
But there’s a much more serious issue. According to the advocates of this strategy, the concept is to safeguard the assets of a lender by looking at “how trustworthy, reliable, emotionally stable and conscientious a customer might be.” There is an extremely difficult task of assessing these aspects in the manner suggested by many others, including James Daley from the group of consumers called Fairer Finance: “If banks think they can psychologically screen bad debt risks, they are deluding themselves.” But, much more, the majority of trustworthy, emotionally stable, reliable, and conscientious clients find themselves in financial trouble, frequently because of economic factors that are completely outside of what they can control.
The past behavior is the most reliable predictor of future behavior. If there’s only a little evidence to base it on generally, it’s the case that people’s behavior can be explained best by examining the context that has shaped their lives. Conducting these tests through tests of personality is a very difficult task.
I am a psychologist who is a professional, and I am proud of being one. I am convinced that my field offers a lot in the realm of health and mental well-being, as well as even the realm of politics.
However, I am also of the opinion that only a tiny fraction of the power of psychology is discovered by “personality tests” that purport to identify issues that, in reality, can be addressed better by other methods.