Results and Discussion

Abstract

This chapter examines the relationships between psychometric assessments and the entrepreneur's business performance (profits) and credit risk (default). Regarding the Big Five 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: the most honest entrepreneurs aren't the most honest. 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 0.57–0.66, which is not extraordinarily strong when compared to credit scoring models in high-information countries and market segments, but it is sufficient to add significant value to the risk analysis task facing banks lending to SMEs in emerging markets. We show that for one of the sample banks, risk of default for low-scoring clients is 50 % higher than it is for high-scoring clients. 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.