Editor’s note: I’m giving this post a plutonium disclaimer. We are not advocating doing underwriting using the studies that Shari describes below. She is calling these studies to our attention in the underwriting context being fully aware that to use them would probably be illegal. It’s just a thought provoking blog post on the internet, folks.
A few months ago, I wrote a post about Dr. Robert Manning’s suggestion that financial institutions consider cash flow, along with credit score, when granting credit.
Since then, I have come across two fascinating articles on this topic.*
The first reports on a study in which researchers showed photos of faces to a group of people (workers from the Mechanical Turks, to be precise). The participants were asked to answer the question “Would you lend money to this person?” The participants looked at the faces in quick succession and pushed a button for yes or a button for no, depending on their knee jerk reaction to whether or not they would lend them money.
Two incredible things happened. The first is that most of the participants rated the pictures of the faces the same. Secondly, the people behind the faces’ scores were statistically similar to the actual credit scores of the people who were being rated. So, for example, if the study had a photo of a man with big ears, most of the people who saw the photo of the man with the big ears said they would not lend him money. Turns out, the man with the big ears also had bad credit in real life. The study also controlled for other variables – from beauty to race to obesity.
The second article discussed a study that suggested that people who don’t have a firm grasp of mathematics are more likely to default on their loans. In this study, they gave a pool of people a math test and over time, the people who did well on the test, paid back more of their debts whereas the people who did poorly on the test had higher default rates. Want to take the test?
While visually sizing people up for shiftiness or giving quizzes for math comprehensive before granting credit breaks all fair lending regulations, it is something interesting to think about. It makes me wonder what credit granting in the far future will hold. Perhaps some day they will find a DNA strand associated with creditworthiness and we will all give saliva samples instead of filling out loan applications.
* Articles: “Physiognomy and economics: About face”, The Economist, March 7th, 2009 (page 86)
“Subprime borrowing and innumeracy: The fear of all sums”, The Economist, May 15th, 2010 (page 84)
Shari Storm is Senior Vice President and Chief Marketing Officer of Verity Federal Credit Union and is the author of the book ‘Motherhood is the New MBA”, available here.