Could Psychological Tests Serve as Economic Vests?

I have always found that economics and psychology have striking similarities. This is particularly true in the domain of decision-making. Studying psychology and economics simultaneously has grounded many abstract psychological concepts and has changed the way that I see the world.

My beliefs were further reinforced after I had the chance to read Daniel Kahneman’s “Thinking, Fast and Slow.” This book synthesizes concepts from psychology, probability, and economics to examine how rationally people behave in specific situations. In fact, this book was a major catalyst for an entirely new field of study. This new discipline is known as behavioural economics. Behavioural economics emphasizes how social, cognitive, and psychological factors impact how individuals make economic decisions. Daniel Khaneman has since won the Nobel Prize in economics and has inspired a new generation of scholars to apply psychological concepts to economic situations.

This blending of economics and psychology led me to wonder if using psychological tests would be a practical way for banking managers and mortgage brokers to decide if a potential loan should be granted. Using psychological tests, with the attempt to curtail irresponsible lending patterns seemed intuitive to me after studying the financial crisis of 2008/2009. This global financial meltdown was caused in part by reckless lending patterns that offered short-term rewards, at the cost of long-term economic (and personal) health. Overvaluing short-term rewards at the expense of long-term intentions is commonly known as present-bias in psychology, or hyperbolic discounting in economics. Formulating psychological tests to examine various employee/borrower tendencies could be a useful step in alleviating these lending patterns and helping reverse the financial crises.

Theoretically, the use of psychological tests (such as the MMPI-2, Big 5, and Risk-averseness test) with the goal of improving societies welfare is a noble goal. However, I have come to question some of the practical issues with regard to implementing these tests as an everyday application.

For one, these tests are often measured on aggregate populations and drawing generalizations about one person due to their score could drastically alter their chances at a fair loan. Second, it would be extremely time-consuming and likely inefficient to administer millions of these tests annually to first-time home buyers. Lastly, many people likely would be able to adapt their responses on the test, potentially leading to a positive skew. These responses could lead to psychological profiles deeming the loan recipient ‘conscientiousness’ or ‘risk-averse.’

Khaneman’s influential work has helped orchestrate a marriage between economics and psychology. I am of the opinion that this new social science, namely behavioural science, will produce many lasting and relevant findings. However, I believe that the costs of applying individual psychological tests to examine the loan worthiness of applicants would outweigh the benefits.

Resources;

Kahneman, D. (2011). Thinking, fast and slow. New York: Farrar, Straus and Giroux.