DETERMINING THE SUITABILITY OF A CANDIDATE FOR RISK

ASSOCIATED PRODUCTS

A99Z, GOlD

The present invention relates to an entrepreneurial behavioural risk assessment.

BACKGOUND

Risk assessments are an essential aspect of determining candidate suitability for a risk associated product or service. These assessments are most commonly used in the banking and insurance industries. In the case of the banking industry, credit worthiness assessments are conducted by analysing the candidate's prior credit record and possibly vetting the content and suitability of a proposed business plan for which the candidate seeks financing. In the case of the insurance industry, current life style and medical history assessments provide the core focus in determining a candidate's risk profile.

While comprehensive in many cases, there are numerous limitations to the current means used in profiling a candidate. In particular these assessments primarily focus on the candidate's history and do not adequately take into consideration the risk of a candidate engaging in high-risk behaviour should the opportunities arise. In addition, many financial product applications are short-sightedly approved or declined, due to the lack of a suitable credit history or poor business communication skills of the candidates.

The flaws in the current methods of risk profiling are highlighted in the entrepreneurial sector. Often candidates who would be deemed suitable if given an opportunity to prove their credit-worthiness are rejected due to lack of risk history or poor business communication skills. Such would-be entrepreneurs are thus denied the opportunity of improving their financial status and thereby limit the potential growth of the economy. The would-be lenders are also denied potential customers.

The invention seeks to provide an entrepreneurial behavioural risk assessment that at least partially ameliorates the disadvantages associated with known risk-profile assessments used to approve candidates for risk-associated products or services.

SUMMARY OF INVENTION

The invention provides a method of creating an entrepreneurial behavioural risk assessment (EBRA) of a candidate using a plurality of decision making heuristics, wherein a profile for predisposition to risk taking and decision making of the candidate is created, thereby enabling a risk-associated product provider to more accurately determine whether the products should be afforded to the candidate.

Preferably the heuristic models selected create a profile of the candidate as a decision maker, utilizing a series of case study and analysis questions, these questions may be structured in a short question format, a multiple choice question format or a combination thereof.

Preferably the EBRA provides a method of creating a decision making profile of a candidate in the absence of a credit worthiness history, business plan or financial statement review to assess a product application. The EBRA can also be used in conjunction with the above mentioned existing analysis methods. This is particularly beneficial where a candidate does not have a credit history or alternative financial information or an inadequate credit history or financial information for purposes of approving him as suitable candidate. Other benefits include creating a more accurate risk profile of the candidate, when determining the risk involved with insuring the candidate.

Preferably the EBRA utilizes a plurality of cognitive biases and heuristics including any one of Framing, Representativeness, Counterfactual thinking, Overconfidence, Excessive optimism, Illusion of control, Escalation of commitment, Planning fallacy, Sunk cost fallacy or Endowment effect. The cognitive biases and heuristics used are not limited to the mentioned list.

Preferably the EBRA determines the candidate's entrepreneurial aptitude by assessing entrepreneurial skills including at least one of commercial numeracy, goal awareness, attitude towards an agency relationship, opportunistic and non-cooperative behaviour.

Conveniently the EBRA includes the steps of providing the questionnaire to the candidate in a paper form, the candidate completing the questionnaire and submitting it for evaluation. Alternately, the questions are completed on a mobile communication device or a fixed terminal device, the answers being processed on the device or submitted to a remote processor for evaluation. Evaluation as to the candidate's suitability for the intended risk-product is based on an EBRA score generated. Evaluation is conveniently undertaken and confirmed by a representative or affiliate of the product provider, whereafter the candidate's application can be approved or rejected based on an alphanumeric score and explanation.

Further features, variants and/or advantages of the invention will emerge from the following non-limiting description of an example of the invention. The summary of invention and claims form an integral aspect of the description of the invention.

DETAILED DESCRIPTION OF THE INVENTION

The invention provides a method of creating an entrepreneurial behavioural risk assessment (EBRA) of a candidate using a plurality of decision making cognitive biases and heuristics. A profile and alphanumeric score describing the candidates predisposition to risk taking and decision making of the candidate is thereby created. A risk-associated product provider is enabled to more accurately determine whether the products should be afforded to the candidate having regard to existing methods. The method involves creating a questionnaire containing numerous multiple choice questions and short questions. These questions test cognitive biases and the manifestation of decision making heuristics thereby indicating a candidate's entrepreneurial aptitude when faced with predetermined conditions. The conditions tested are determined by likely risks and factors experienced by the candidate in the sector or category of business activity. The answers given establish the candidate's predisposition to certain behavioural traits and thereby indicate likely conduct as and when such conditions present themselves. In the case of a financial institution, a candidate is able to be assessed for responsible or risk-averse financial management behaviour and decision making biases. The uncertainty behind how a candidate will respond in a future risk associated situation is thereby made more certain. Such certainty was previously unavailable, particularly in circumstances where the candidate was not afforded the opportunity to engage in a specific high-risk behaviour. The EBRA allows a product-provider to ascertain risk-taking and decision making behaviour with a greater degree of certainty.

The questionnaire is completed by candidates to evaluate whether the meet or approximate predetermined conditions. The questionnaire may be paper based or completed using a mobile communication device such as an appropriately enabled cellular phone, or a fixed computer terminal in the financial institution. The paper questionnaire is submitted to a representative of the financial institution or transmitted electronically, as the case may be.

Industries wherein the EBRA may be applied include financial, insurance, private equity, trade credit or franchise industries. The applications for such industry related products or opportunities are either granted, rejected or considered in a different light in accordance with the EBRA profile generated. Also the EBRA may be used by rating agencies wherein a ccommercial rating is generated in the form of an alphanumeric score. Areas of concern may also be identified and communicated to the candidate. Guidance and training can then be sought to address these cognitive biases if necessary. The EBRA may thereby be used to both evaluate decision making inadequacies and provide highly relevant information which may ultimately result in a larger pool of suitable candidates. In a banking environment, the EBRA should facilitate a responsible increase in financing decisions in favour of creditworthy candidates who would currently be filtered out by current lending technologies. These existing technologies do not produce sufficient information cost effectively on the entrepreneurial aptitude or decision making biases of the applicants.

The heuristics and non-limiting definitions examined include the following non- exhaustive list:

-Representativeness :

Generalization about an event based on only a few observations of similar events. These events can be associated with biases including base rate and sample size neglect

- Framing:

Risky decisions are framed narrowly as a means to deal with situations of complexity or uncertainty.

- Counterf actual thinking:

A tendency to dwell on the past, imagining what might have been should a different decision been taken; an alternative action taken or different circumstances arisen.

- Overconfidence

A tendency to overestimate the correctness of initial estimates when answering moderate to difficult questions or dealing with ill-structured decision situations. Initial estimates are not revised after receiving new information. Assumptions are treated as facts and they do not see uncertainty associated with conclusions stemming from those assumptions.

- Excessive Optimism Systematically overestimating the probability of a favourable outcome and/ or systematically underestimating the probability of an unfavourable outcome.

- Illusion of Control

An overemphasis of the extent to which a decision-makers skill can increase performance in situations where chance (or other external factors such as credit rationing) plays a significant role and skill a lesser one.

- Escalation of Commitment The tendency, under certain conditions, to overly commit to a past decision despite negative feedback, and to make further decisions biased by this commitment.

- Planning Fallacy The tendency to overestimate the amount that can be achieved in a specific time or to underestimate the time that will be necessary to complete a specific task.

- Sunk Cost Fallacy The choice of future alternatives is influenced by costs incurred in the past which can never be changed.

- Endowment Effect

The propensity to value what one has more highly than an opportunity to newly acquire the same good.

The EBRA can be used in conjunction with existing methods of financial behaviour models to more accurately determine the risk profile of a candidate. The value of EBRA is however best illustrated where existing methods lack suitable data to be of analytical benefit.

The invention is not limited to the precise details described above. The summary of the invention forms an integral part of the description of the invention. Modifications may be made and other embodiments developed without departing from the spirit of the invention. For example different types and quantities of heuristic models may be used to create an EBRA. The comprehensiveness of the EBRA would be determined by the type of product being offered.