Tests of character

Lie-detection the old-fashioned way

HOW would you feel if you were invited to the moon? If you found a gold coin, would you save it, give it to charity or splurge on a holiday? Personality quizzes of this kind—“psychometrics”, in the jargon—are already the bane of many a jobseeker. Now, it is being applied to the oldest problem in finance: will a borrower repay?

In rich countries, lenders use credit scores to weigh risk. But just 7% of Africans and 13% of South Asians are covered by private credit bureaus. Bailey Klinger of the Entrepreneurial Finance Lab (EFL), which explores new kinds of credit data, argues that psychometrics could scoop many more people into the financial system. Everyone has a personality, after all.

Judging character is not new. Psychometrics attempts to make it a science. EFL began life as a research initiative at Harvard. The model used by Creditinfo, a rival firm, was developed with help from Cambridge. Their online quizzes are road-tested and tweaked for different cultures. Sifting the data reveals telling patterns: for instance, EFL found that young optimists are risky, but old ones are a safe bet....

via The Economist: Finance and economics Business Feeds

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