Behavioral Science

Blog | The LenddoEFL Assessment Part 1: Using psychometrics to quantify personality traits

By: Jonathan Winkle, Manager of Behavioral Sciences, LenddoEFL

At LenddoEFL, we collect various forms of alternative data to help lenders verify identities, analyze credit risk, and better understand an individual. One of our most important tools for financial inclusion is our psychometric assessment. While some people still lack a robust digital footprint, everyone has a psychological profile that can be characterized and used for alternative credit scoring.

In this series of posts, we shed light on the science behind the LenddoEFL psychometric assessment and how we’ve pioneered an approach to measure anyone’s creditworthiness.

Psychometrics for credit assessment

LenddoEFL employs a global research team to ensure our assessment captures the most important personality traits that predict default. We deliver innovative psychometric content by combining insights from leading academics with years of in-house research and development.

Each question in our assessment is targeted to reveal psychological attributes related to creditworthiness. We quantify behaviors and attitudes such as individual outlook, self-confidence, conscientiousness, integrity, and financial decision-making in order to build an applicant’s psychometric profile. By comparing this profile to others in the applicant pool, we can better understand and predict an individual’s likelihood of default.

Psychometric example content: Financial Impulsivity

The marshmallow test asks children whether they would you like one marshmallow now or two marshmallows later, and since its advent, psychologists have recognized that the ability to delay rewards is an important predictor of later success in life.

While adults might not long for marshmallows the same way children do, a similar test can be performed using financial rewards, and research shows that people who are better at delaying rewards are less likely to default on their loans.

Drawing from this research, we ask applicants which of two options they would prefer, a smaller sooner amount of money, or a larger later amount (see image below). Asking people for their preferences across a range of monetary values and temporal delays reveals a quantitative profile of their financial impulsivity, which is indicative of their likelihood to repay debts (If you’re curious about how we deal with people trying to cheat or game the assessment, please see this blog post on our Score Confidence algorithm).

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Psychometric example content: Locus of Control

When times get tough, some people believe they can take action to overcome hardships while others believe that the challenges they face are altogether out of their hands. Those who believe their lives are governed by outside forces, an external Locus of Control, are more risk-averse and have more difficulty managing their credit.

We ask applicants to rate their agreement with a battery of statements measuring their Locus of Control, such as “My life is mostly controlled by chance events,” and “It is mostly up to luck whether or not I have many friends.” By asking these types of questions, we can precisely quantify someone’s Locus of Control along a spectrum of internal-to-external and use this data to predict default.

Conclusion

LenddoEFL delivers an innovative psychometric assessment by combining evidence from academia with active, internal research and development.  The examples above demonstrate how we quantify certain personality traits, and the myriad exercises we use in the field allow us to produce a rich psychological profile that is predictive of credit risk. In the next post we will explore the concept of metadata, which will show that how people answer psychometric questions is just as important as the answers themselves.

Blog | iDE Ghana increases access to sanitation with help of innovative credit assessment from LenddoEFL

Partnership allows Ghanaians to purchase their first toilets

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Globally, 32% of people lack access to a toilet in their homes (Source: WHO UNICEF JMP). In Ghana an astonishing 87% of people do not own a toilet. And in rural Northern Ghana, it is worse still. Two out of every five children in northern Ghana are stunted, compared to approximately 20% of children stunned nationally (Source: UNICEF).

iDE Ghana, a nonprofit that creates income and livelihood opportunities for poor rural households, wanted to improve sanitation in the region. They began by applying design thinking to understand the low rate of toilet use. It turned out that people didn’t know where to buy a toilet, and if they did, it was prohibitively expensive to buy.  People could not afford the full cost all at once, and there were no options to pay for a toilet over time, as there were for other large purchases.

"What we found was the criteria for borrowing towards non-income generating loans were ridiculous. So we set up a one stop shop for toilets and sanitation products, selling them door to door,” explained Valerie Labi, WASH Director at iDE Ghana. “And the beauty of the model is that we give our customers 6 to 18 months to pay the toilet off over time.”

This seemed like the perfect solution given the challenges to toilet purchasing uncovered, but it was still challenging. “We allowed people to pay over the course of 6 to 18 months but we required for the customer or a guarantor to prove their income with bank statements or payslips. And this was a big deterrent. No one wanted to give their bank statements to a toilet company. And it would take an average of 40 days to get through the process” Labi shared. “We realized these requirements were scaring away customers as they’d never had formal credit before. So we asked ourselves, how else could we assess creditworthiness in a more inclusive way?”

That’s when they came across LenddoEFL universal credit assessment. By collecting behavioral and psychometric data at the time of application, iDE’s commercial agents will be able to assess risk and make a decision in a day or less, cutting down the time to sale greatly. Previously, the commercial agent made multiple calls and visits to collect the required documents. By using the LenddoEFL score, iDE removes the need for a guarantor or proof of income for the best scoring customers. Low scorers will need to pay 50% of the cost of the toilet in monthly installments before receiving the toilets.

iDE’s goal is to provide 20,000 to 25,000 toilets to households in Northern Ghana. At an average of 11 people per household, this will provide life-saving sanitation for 275,000 people. And the plan is to sell toilets as part of a fast, convenient customer-driven process and at affordable rates. With the LenddoEFL assessment in place since February 2018, iDE is already receiving positive feedback for customers who enjoy the process. Stay tuned for updates on this exciting partnership.

Welcoming our New Behavioral Science Manager

In this photo, Jonathan demonstrates cultural differences in height during a field visit with loan applicants in Veracruz, Mexico.

In this photo, Jonathan demonstrates cultural differences in height during a field visit with loan applicants in Veracruz, Mexico.

Since our merger, we have welcomed a number of incredible new colleagues onto the LenddoEFL team. Jonathan Winkle joins us in our Boston office as our new Behavioral Science Manager. We cornered him to learn more.

Tell us about your background?

In undergrad I majored in psychology, where I developed a passion for researching the brain and behavior. To gain more experience after college, I worked in a systems neuroscience lab at MIT studying visual attention. Eventually I found my way to Duke where I earned my PhD in cognitive neuroscience. My dissertation focused on the behavioral economics of dietary choice, investigating how the mind is affected by “nudges” that can bias people towards healthy (or unhealthy) eating habits.

What brought you to LenddoEFL?

Studying behavior has always excited me because it is the ultimate endgame of our brains’ hard work, yet academic research on the topic can often be too disconnected from real-world problems. I found myself wanting to make more of an impact on society, and in this role I can leverage my experience to quickly and directly improve people’s lives around the world. As the Behavioral Science Manager for LenddoEFL, I can test a new hypothesis and apply that knowledge globally in a matter of weeks. And the better I do my job, the more people I can help get access to life-changing financial services.

What are your plans as Behavioral Science Manager?

My primary goal is to drive feature engineering. Features are the observations we collect about individuals to predict credit risk, and feature engineering is the process of discovering and creating new features to make our algorithms work better. For example, how honest a person is might be predictive of loan default, but we first need to quantify honesty as a feature to use it in a predictive model. As new features make our models more predictive and more powerful, our financial institution clients all over the world will gain a better understanding of their under-banked loan applicants.

If I am successful, we will be better at predicting if someone will repay their loans, thereby allowing our clients to make the best, most informed decisions possible. No pressure.

Across data sources, we look for ways to profile a person’s character, trying to understand how traits like honesty or conscientiousness relate to credit risk. This is a hard, but extremely important challenge.

LenddoEFL deals with both psychometric/behavioral and digital data sources. How do those differ and how do you think about each?

On the psychometric side, we engineer the form our data will take from the outset, then extract it by inserting new content (e.g., survey questions or psychometric games) into our simple, interactive assessment. We can be more hypothesis-driven when it comes to designing features in this realm.

On the digital side, we work with large, unstructured data sources where we necessarily have to be more exploratory and let the data do the talking.

Will you be working with our research advisors?

Absolutely! I am looking forward to working with leading researchers like Peter Belmi to push the envelope of our own research while also sharing the insights gained from our unique dataset with those in the field of behavioral economics. We will also be inviting more researchers to collaborate on our work.

Enough about work, what do you do for fun?

I like to rock climb, play Go, hang out with my dog Clementine (pic below), and try out new recipes in the kitchen.

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What’s a fun fact about you?

I have a tattoo of Phineas Gage, a famous figure in the history of psychology and neuroscience. Gage was a railroad worker in 1848 that lost the left pre-frontal cortex of his brain when an accidental explosion sent a 3 foot iron rod rocketing through his head. Miraculously, he survived and was even able to walk himself to a doctor despite the 11⁄4 inch hole running behind his left cheek and out the top of his skull. He lived for 11 years after this event, but experienced marked changes in his personality that have been studied ever since. The story in itself is fascinating, and of particular interest to me is how Gage’s misfortune shaped theories of the mind for more than a century after the accident.

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Look out for a future post from Jonathan about his field work in Mexico and learnings about group dynamics.