What Are Psychometrics Anyway?According to the Psychometric Society, psychometrics are the measurements and quantifications used in psychological research. Psychometrics "cover virtually all statistical methods that are useful for the behavioral and social sciences." They usually involve questionnaires that ask a series of questions to help a researcher better understand a person’s knowledge, morals, personality traits, and the like. If you have ever taken a Myers-Briggs Type Indicator (MBTI) personality test, then you have experienced psychometrics in action.
Psychometrics and BusinessPsychometrics is more often found among human resources and learning development professionals, but not used among investment banks. Why not? Wouldn't it make sense (putting aside for a second the Orwellian undertones) for a bank to have a psychological profile to accompany an applicant’s portfolio? The lack of personality assessments issuing out loans could stem from an adherence to business as usual: more worth is placed in the value of one’s assets and financial behavior, not one's personality. This of course makes it harder for budding entrepreneurs without strong assets to begin with. In light of the Great Recession and the burdens it has placed on debtors, and in light of entrepreneurs with solid business plans and savvy personalities, alternative funding practices should come about (and have) to help new businesses.
Psychometrics, Crowdfunding, and the Future of EntrepreneurshipThese days, in this tough investment climate where the competition is fierce, people are looking for new ways to gather startup funds and stand out in the crowd. What has been receiving attention has been crowdfunding. Already a hot topic when it comes to nonprofit and arts-project fundraising, it may become a hotter topic when the JOBS Act goes into effect and allows for equity-based crowdfunding. Equity-based crowdfunding allows small businesses an alternative fundraising through venture capitalists, who are still largely risk-averse investors at the moment. Psychometrics could present another opportunity for small-business owners to secure funds from the very institutions that would have otherwise in the past denied them a loan. Currently, the researchers behind EFL have been applying their studies to international economic development, yet one could imagine psychometrics being used in U.S. banks. From the same Salon article, Fitzgerald points out the delinquency rate of entrepreneurs:
“The bank [Standard Bank of South Africa] found that when an entrepreneur qualified for a loan using both the bank’s traditional credit scoring methods and EFL’s questionnaire, delinquency rates were 2.8 percent. Applicants who qualified for a loan based only on the banks’ traditional credit scoring methods had a delinquency rate of 14.5 percent. And in 677 of 913 applications, where the bank said no but psychometrics said yes (and therefore a loan was granted), the delinquency rate was 9.7 percent. Psychometric evaluations were helping Standard access, albeit on a small scale, a huge new pool of fairly successful borrowers that it otherwise would have turned down. Those 677 businesses now had access to growth capital, enabling them to hire new employees.”Given the success rate described above, it would sense that a lender might want to consider using psychometrics, at the very least in conjunction with traditional evaluation methods. If we use my LA friend again to illustrate, we could say that even though she has not done anything to damage her credit history, she still has to get around her lack of creditworthiness; although this news may mean that she may soon have more options. Given the accelerating presence of crowdfunding, and the innovative approaches being developed to determine risk on factors aside from creditworthiness, entrepreneurs like her may find it easier to bring their businesses to life.