collage of money, key, globe, worker, harvard collage of money, key, globe, worker, harvard
collage of money, key, globe, worker, harvard
collage of money, key, globe, worker, harvard collage of money, key, globe, worker, harvard

New Screening Technologies

Our initial focus is on applying psychometrics to the screening problem in the missing middle. Psychometrics, whose literal meaning is measurement of the soul, refers to the use of tests and questionnaires to measure knowledge, abilities, attitudes, and personality traits.

There are many studies on the traits and characteristics of successful entrepreneurs. These studies have moved beyond the search for the entrepreneurial "personality" and have uncovered a host of psychological, sociological, and cognitive features that have robust links to entrepreneurial success. Many of these studies use psychometric instruments that could be applied directly to the screening problem.

There is also a large established industry using psychometric testing for pre-employment screening. According to a 2001 survey by the American Management Association, 29% of employers use psychological assessments of employees for selection and development. The use of intelligence and ability tests are even more common, with 80% of employers using them to some degree to select employees1. Moreover, the use of these automated selection tools is growing dramatically. A more recent survey found that between 2002 and 2007, the use of personality assessments for selection went from 21% to 59% of surveyed employers, the use of cognitive ability tests went from 26% to 41%, and the use of more general skills/knowledge tests went from 12% to 56%2. There are over 2,500 companies in the US successfully developing and selling these psychometric tests for employee selection, and demand continues to rise.

Psychometric testing of job applicants is expanding so quickly because of its effectiveness. A meta-analysis published by the American Psychological Association found that tests of general cognitive ability have the highest validity of all selection methods. These tests out-perform screening based on personal interviews, biographical data, and past education and experience. The combination of a cognitive ability tests and an integrity/honesty tests has one of the highest composite validities of any combination of techniques3.

There are clear parallels between employee selection and the screening of SME loan applicants. Employers use these tests because they face a similar problem to banks trying to finance SMEs: how to predict performance and select among a large pool of applicants in a low-cost systematic way. As with employment screening, the traditional methods of screening applicants for finance are based on demographic and socio-economic variables, past behavior, and personal interviews. Although these techniques have been shown to be inferior to psychometric screening in personnel selection, these psychometric screening tools have yet to be applied to the realm of entrepreneur identification and evaluation.