Daily Bulletin

The Conversation

  • Written by Daily Bulletin

Lending money is a risky business. Since 2010, Bank of England figures reveal that lenders have written off an average of £13.2 billion a year in bad loans. You can never be 100% sure that you will ever get your money back.

One way of mitigating that risk is to know as much as possible about the person you are lending to. Indeed, some financial managers reportedly are now considering the use of personality tests to assess the suitability of borrowers seeking loans or credit agreements.

A new model developed by the University of Edinburgh’s Business School, for example, asks borrowers questions designed to reveal their trustworthiness. But could such tests, already used in various forms by some businesses to assess the suitability of potential employees, really work for lenders?

Predicting the future

The conventional way to assess the likelihood that someone might default is to look at their income and expenditure, their assets and their commitments, and make predictions on the basis of their financial circumstances. We also know that a person’s “credit history” is important – it is useful to know if a person has defaulted on loans before, or has other credit problems in their past.

This is all psychologically valid. It’s a well-known principle that the best predictor of future behaviour is past behaviour. But how do you make predictions where someone has little or no credit history?

imageLenders are looking at new ways to assess potential borrowerswww.gotcredit.com, CC BY

This is where psychological tests could come in, and there is some superficial attractiveness here. If – and the word “if” is important – a person’s likelihood to default on a loan was related to their “personality”, and if (again) that was a measurable trait, and if (yet again) that trait could be measured in a way that was impervious to fraud or manipulation, and if – finally – such a questionnaire was asking questions that were something other than the obvious (or the spurious), then they could indeed be a useful tool.

Gaming the system

But there are problems. We learned recently that psychological science is good, but it’s a long way from infallible. In an attempt to replicate key psychological experiments, scientists found that they could substantiate the findings in only about half the studies examined. That may not mean we should lose faith in all psychologists, but it does mean that we should be a little sceptical when we’re told that a particular set of questions can predict loan defaulters.

Indeed, looking at the reported questionnaires, there seem to be a curious mix of questions, including: “I believe others try to do the right thing”, “I believe in human goodness” and “I pay attention to small details”. There may well be links between people’s typical responses to these questions and financial soundness, but the evidence would have to be convincing.

It’s much more likely that, if people want a loan, they will try and game the system. There is a strong chance they would give the answers that they think reflect a better credit trustworthiness: “I definitely pay attention to financial details. I am perhaps, if anything, too cautious.” As opposed to: “Oh, I don’t care, just give me the cash.” Any psychological assessment scheme would have to be robust to such game-playing, perhaps by asking more opaque questions.

Real data

But there’s a more insidious problem. According to the proponents of this approach, the idea is to protect a lender’s assets by assessing “how trustworthy, reliable, emotionally stable and conscientious a customer might be”. First, there is the very real difficulty of assessing these things, as pointed out by, among others, James Daley, of the consumer group Fairer Finance: “If banks think they can psychologically screen bad debt risks, they are deluding themselves.” But, more than this, very many trustworthy, reliable, emotionally stable and conscientious customers find themselves in financial difficulties, often as a result of economic forces entirely outside their control.

Past behaviour is the best predictor of future behaviour. Where there is very little data to go on, it’s then usually the case that people’s behaviour is best explained by looking at the circumstances of their lives. Doing this through personality tests, however, is clearly very tricky.

I am a professional psychologist, and proud to be one. I believe that my profession has much to offer, in the world of mental health and even in the world of politics.

But I also believe that very little of the potential of psychological science is revealed by “personality tests” that purport to address problems that, in truth, are better addressed through other means.

Peter Kinderman is an honorary (pro bono) Consultant Clinical Psychologist with Mersey Care NHS Trust. He has received research grant funding from the Medical Research Council, the Economic and Social Research Council, the Wellcome Trust, the NHS Forensic Mental Health Research and Development Programme, the European Commission and others. He has written two books from which he receives extremely modest royalties as well as numerous academic papers. He is occasionally paid for time, travel, and accommodation to give talks. He was elected President of the British Psychological Society (to serve 2016-2017) and is therefore a Trustee of the Society, which is a charity registered in England and Wales (Registration Number: 229642) and also in Scotland (www.bps.org.uk/ Registration Number: SC039452). He is also a founding Trustee of the Joanna Simpson Foundation (www.jsfoundation.org.uk Registration Number: 1157972), dedicated to the care of children affected by domestic abuse and homicide.

Authors: Daily Bulletin

Read more http://theconversation.com/why-personality-tests-for-bank-loans-are-a-bad-idea-47373

Writers Wanted

Three weeks without electricity? That's the reality facing thousands of Victorians, and it will happen again


'A slow and painful journey': why did it take over 20 years to approve the new Alzheimer's drug?


The Conversation


Prime Minister interview with Karl Stefanovic and Allison Langdon

Karl Stefanovic: PM, good morning to you. Do you have blood on your hands?   PRIME MINISTER: No, it's obviously absurd. What we're doing here is we've got a temporary pause in place because we'v...

Karl Stefanovic and Allison Langdon - avatar Karl Stefanovic and Allison Langdon

Prime Minister Scott Morrison delivered Keynote Address at AFR Business Summit

Well, thank you all for the opportunity to come and be with you here today. Can I also acknowledge the Gadigal people, the Eora Nation, the elders past and present and future. Can I also acknowled...

Scott Morrison - avatar Scott Morrison

Morrison Government commits record $9B to social security safety net

The Morrison Government is enhancing our social security safety net by increasing support for unemployed Australians while strengthening their obligations to search for work.   From March the ...

Scott Morrison - avatar Scott Morrison

Business News

Six Tips to Get your Business Known on Social Media

Social media is one of the most effective ways to market your brand to the masses. With the meteoric rise in popularity of various social media platforms over the past decade, millions of brands h...

NewsServices.com - avatar NewsServices.com

Boom in Aussies buying up restaurants, pubs, hotels and bars in regional centres

With international borders closed, regional Australia is seeing a dramatic surge in popularity as people move out of the cities and into their quaint communities. City slickers are looking for new...

Tess Sanders Lazarus - avatar Tess Sanders Lazarus

5 Signs Your Business Needs Onboarding Software

Onboarding software is the technology that automates a smooth transition for new hires from before the interview to the first day on the job. High-quality onboarding platforms feature a digital da...

Onboarded - avatar Onboarded