Advisors Can Only Rely on Psychometric Testing

Advisors Can Only Rely on Psychometric Testing

If you’ve ever been told you are a four-character personality type, such as a ISTJ, INFJ or ESTJ, you’ve met the Myers-Briggs Type Indicator (MBTI) test. It was most probably while you were dealing with a recruiter or human-resources person, but unfortunately, they learned nothing about you from this test — because it does not work.

Myers-Briggs is a great example of a ‘psychological test’ that looks okay on the surface but is rotten underneath. It has repeatedly failed tests of validity and reliability in academic settings and, as a result, is shunned by serious researchers.

But the MBTI test is alive and well out in the business world, where your next career move could end up depending on it! Around 2 million jobseekers a year suffer this questionnaire that could just as easily describe their personality incorrectly as correctly.

The problem is that tests like the MBTI are certainly ‘psychological’ but they are not ‘psychometric’ and there is a huge difference between the two. Understanding that difference is important for financial advisors, who are relying on the results of risk tolerance tests when giving investment advice. To be reliable, the test must be psychometric.

Reliability has a special meaning in psychological testing — it means you’ll get much the same result regardless of who gives the test or where it is taken. And, critically, if we re-test in the future the new result should be consistent with the old.

Validity is another special meaning in word in in psychological testing, which means that the test is measuring what it says it measures. For example, a test measuring financial risk tolerance cannot include questions about risk capacity, or driving cars too fast, because these are unrelated to financial risk tolerance. The test stops being ‘true to label’.

The Myers-Briggs test consistently fails scientific reviews of its reliability and validity. These problems can be traced to the development for the MBTI test, which did not use scientific processes.

The MBTI test was developed by Katharine Cook Briggs and her daughter Isabel Briggs Myers, who based their work on the theories of psychiatrist Carl Jung — whose work was observational and deductive. Katharine began developing her personality-types framework in 1917, based on her own reading of literature an introspection.

However, her work then languished for more than 20 years. Katharine and her daughter did not create a test until 1944, when it found traction as a tool to help place women into appropriate industrial jobs in America during World War II.

But they had constructed their 16 personality types and test using their own ‘best judgment’. They were not experts in psychology and did not seek expert input or review. As so often happens during wartime, it was brought into service in a rush. It is remarkable that it has been able to endure for so long, given its now well-known shortcomings.

However, many advisors are today using risk tolerance questionnaires that were created in the same way as the discredited Myers-Briggs test — well meaning people, using their non-expert best-judgement. Often these tests are fatally flawed and would fail any scientific review or evaluation. But in a business setting they endure, just like the Myers-Briggs test.

The problem is not that these flawed tests will never be right — the problem is we will never know when they are being right or wrong! Because, at times, a ‘junk’ test will, by chance, give an accurate description of a person’s personality trait.

But so will astrological star-signs. Scorpio, for example, might perfectly describe someone born between 23 October and 22 November. But there is a bigger chance it won’t — Pices or Gemini or one of the nine other ‘types’ might be the better fit regardless of birthdate.

Psychometric testing of personality traits overcomes these problems because it produces results that are both reliable and valid — and able to be reviewed and audited by academic experts for accuracy and integrity.

Psychometrics is an amalgam of psychology and statistics that can quantify and assess psychological traits and constructs. Psychometrics is well-established and accepted science, with validation tools to determine the technical quality of psychological assessment tools such as questionnaires.

The FinaMetrica risk tolerance test is psychometric and was developed using scientific process and review.

The development of FinaMetrica took almost four years. There was extensive testing of the test-instrument (the questions) and the ‘proving’ of results for validity and reliability. Anything that did not meet the high bar set by the rigors of psychometrics was quickly rejected.

More than 100 questions were tested in rigorous academic environments and processes, with most being discarded as they were not dependable in producing valid and reliable results. The final test was reduced to 25 questions, where confidence about validity and reliability was very high.

The FinaMetrica psychometric test of financial risk tolerance was a world-first, that continues to be a world-leader with more than 1.3 million investors now tested. Over the past two decades it has been subject to many independent reviews, with data from the test being used in several academic research projects where the numbers were crunched to prove they are correct.

But, in the meantime, if you are hunting for a job hope you don’t run into that Myers-Briggs test — because being incorrectly labeled an Idealist (INFP personality) instead of an Advocate (INFJ personality) could end up costing you a dream job!

I have been using FinaMetrica for over 17 years for onboarding new clients. They like the extensive value of the reports; but what we appreciate is the innovations in technology, the value of the client-facing materials and the development of the life-long client relationships as I get to really know their behavioral tendencies. FinaMetrica has assisted me in building a very successful practice and we highly recommend it for any advisor who wants to enhance the overall value of their client relationships.

Ron Wilkinson - Portland, Oregon, USA
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