Psychometric testing is a field of assessment that deals with the theory and practical applications of psychological measurement. Acknowledged as a scientific standard method used to measure an individual’s psychological capabilities and behavioral styles, it is often used to measure a person’s suitability for a position based on the required personality characteristics and disposition or cognitive abilities. In this scenario it is a metric utilized to gauge and understand the congruency between the personality of the individual and the skills required to perform a particular job. Psychometrics enables a deep and holistic understanding of the individual’s latent skills, qualities, self-esteem, capacities, capabilities, communication styles and emotional intelligence which would have otherwise been difficult to extract from a face-to-face setting. This type of testing can be used to assess the competencies, characteristics, temperament, personality traits, skill sets and accomplishments of an individual.
Psychometric testing is based on the assumption “past behavior is the best predictor of future behavior” by Albert Ellis. Most of these tests are derived from robust, renowned psychometric theories.
Psychometric assessments are formal structured exercises designed to measure psychological qualities such as reasoning ability, logical knowledge and personality factors. These tests are grounded in science and are carefully researched and scientifically tested to ensure fairness, reliability and validity. Tests are administered and scored in a standardized way, allowing a neutral, unbiased comparison with people who have taken the test before.
Some other reasons are :
1. Best predictor for performance
Studies have shown that modern psychometric testing produces the best prediction of job performance. Used extensively by the corporate sector in recruitment processes, promotion cycles, or internal realignment of portfolios and responsibilities.
In terms of the recruitment process, the tests aid in the selection of hiring a suitable employee for the job. The cost of hiring and training inappropriate candidates can be high in terms of loss in revenue, decreased efficiency, and the cost of the selection process. Often when a person is promoted to a new position it transpires that person does not have the necessary aptitude or skills required for the job. At these times psychometrics can play a very important role.
Another instance is when a person’s role expands, or a person's job description changes, little time is taken to understand the preferences of the person and where the person would be most capable to perform according to their profession. Psychometric tests add value to the entire employee cycle, giving insights into what kind of roles the person is fit for, which culture can he/she thrive in, how they can improve their leadership, sales and management skills.
2. Wide array of selection tools
The tests can measure verbal, numerical, abstract, personality , aptitude and / or intelligence. It gives a complete and scientific view of a person.
3. Enhances the decision-making process
Any decision making process involves a series of steps taken to arrive at a decision. Psychometric tests help provide a more rounded approach to decision making by giving layers of extra scientific information about the person ensuring an impartial process. They increase output and efficiency, higher morale and enable a more objective analysis to take place.
4. Helps eliminate unconscious bias
Psychometric tests help eliminate any biases / subjectivity that could occur when a decision to hire, promote, decide whether a person should be given particular work or any other personnel decision.
5. Helps identify talent pool and developmental needs
Psychometric evaluation can act as a roadmap for identifying training and development needs for the organisation, being able to customise according to the actual employees needs and skills and behaviours needed for the particular business/department. Without these roadmaps, organizations tend to group employees based on past training needs, which might not be relevant for current organizations dynamics.
Psychometrics and fintech:
Consumer credit sector Psychometrics is an applied science which has been backed by over a century of research. Psychometrics is a science of measuring mental abilities and behavioural traits of an individual. The objective within fintech is to seek methods to improve and automate the delivery and use of financial services. Lenders have begun to understand that this science can add value to their existing credit risk models by giving more inputs into the borrower’s personality i.e. responsibility, trustworthiness, and dependability, helping them include this critical information for giving credit which is currently being missed out. Also a large section of the population that is underbanked and unbanked cannot access credit. This market needs an alternative credit score giving lenders confidence in lending to borrowers whom they don’t know, with some understanding of their intent to repay the loan.
The borrowers creditworthiness can be assessed beyond the traditional credit scores which are based primarily on historical financial data and which might not exist, or might have changed because of change in paradigm and economy. Psychometrics for credit risk aims to do just that, improve the existing credit risk model by providing a century old science to assist lenders in providing financial services to existing borrowers, underbanked and unbanked borrowers in a more holistic approach.
Psychometrics has been used by some other fintech companies to detect the risk appetite of the borrowers, integrity , fraudulent behaviour, improving customer support , data driven client acquisition , detecting signs of discrimination and harassment, customizing financial products based on customer information. While psychometric tests, questionnaires and surveys have been used extensively, psychometrics in the gamification space has been relatively new and still people aren't aware of its benefits in the lending space.
While already established psychometric tests have a lot of data , and research already backing them up, this area is still new and is in the process of validation and reliability. However once this alternative credit risk model has been validated by loan repayment history and existing credit bureau scores, in addition to the relevant psychological theories on financial conscientiousness, this Psychometrics AI will be a breakthrough for the fintech industry.