Enterprising Psychometrics and Poverty Reduction (SpringerBriefs in Psychology)
EFL's method has been covered in a number of media reports e. The basic idea is to apply psychometric data as the basis for determining whether to give micro-finance loans to would-be entrepreneurs in developing countries. In such emerging markets, traditional credit scoring used in industrialized nations are either not available or less reliable. If it works psychometrics might help to give loans to entrepreneurs who are less likely to default and thereby fight poverty in a more efficient way.
Given that this is a proprietary test, it is difficult to get detailed information about the kind of data that is used. According to the news reports and the company website, they assess fluid intelligence , certain attitudes and beliefs that are predictive of entrepreneurial success e.click here
Bailey Klinger (Author of Enterprising Psychometrics and Poverty Reduction)
Part of these data rely on self-report questions, others seem use more behavioral data e. To predict creditworthiness, they use Bayesian hierarchical modeling. From what I gather, initially, they used data from meta-analyses of predictors of entrepreneurial success as input e. Now, they seem to use their own data for model-building. Citing from an abstract of chapter 2 of the book:.
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Regarding the Big 5 personality traits , extroversion is found to be strongly related to higher profit levels, with weaker relationships for agreeableness positive and conscientiousness negative. Interestingly, integrity is found to have a weak negative relationship with profits: Conversely, when considering default risk, the lowest risk entrepreneurs also tend to score higher on the integrity assessment, as well as register higher levels of conscientiousness.
Digit span fluid intelligence , controlling for level of education, is negatively related to profit levels, but is not related to default risk. When combined , these relationships with conscientiousness, honesty, and level of education have an AUC a common metric of credit score predictive power of 0. Furthermore, we show that these results can be improved by customizing models to each country and financial institution , which isn't surprising given the cultural differences between Peru, Colombia, Kenya and South Africa.
While traditional methods of model building suffer challenges of doing this customization without large amounts of data, new methodologies such as Bayesian methods are shown to offer promise to improve results even further, making customization without over-fitting possible and further strengthening the case for using psychometric tools for credit risk analysis. An obvious question is whether this type of assessment can be gamed by malicious borrowers and loan officers who tell their customers how they think they should answer to get the loan.
EFL says they take various measures to prevent that e. The company claims to by highly successful in improving the quality of loan decisions by presenting a series of case studies. Nevertheless, given that this is a for-profit company and all analyses take place behind closed doors, it might be prudent to take this information with a grain of salt.
Enterprising Psychometrics and Poverty Reduction.
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How can psychometric or behavioural tests be used in banking to evaluate creditworthiness? Banks use stronger signals of creditworthiness collateral, credit rating, job, etc.
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But some private investors indeed hire psychologists to screen business people asking for money. Innovations in Poverty Reduction: As the deadline for the Millennium Development Goals draws near, one of the most critical--global poverty reduction--remains at best a work in progress. But as emerging markets beckon millions of aspiring business owners to set up shop, age-old barriers to funding prevent them from getting started.
Enterprising Psychometrics and Poverty Reduction sets out in accessible detail this innovative approach to risk evaluation, which uses methods similar to psychometric tools used in corporate hiring.
The book evaluates this approach in six financial organizations in Kenya, Colombia, Peru, and South Africa, with extensive charts and tables breaking down each program's profitability and effectiveness. Especially by eliminating disparities that prevent women from accessing credit, this assistance fuels long-range economic growth and general well-being.
Explains the psychometric approach to credit and its methodologies.
Identifies core characteristics shared by successful small business owners. Outlines a novel approach to credit scoring models for small businesses. Reviews the relevant literature on personality and personality testing. Features representative success stories.