From the May 2005 issue of Investment Advisor • Subscribe!

THE GLUCK REPORT, Part II: Going to the Source

We ask an expert on psych tests for some recommendations

Edward Hoffman wrote the book on psychological testing at work. Hoffman is a New York-based licensed psychologist and organizational consultant specializing in testing, an adjunct professor at Yeshiva University, and author of more than a dozen books, including Psychological Testing at Work (McGraw-Hill). Here's what he told me about how advisors can use testing. You can contact him at elhoffma@yu.edu.

How big is psychological testing in the workplace and what companies are using it? A big problem is that the information is proprietary. So for many tests in business, there is little concrete information available. While the Myers-Briggs Type Indicator (MBTI) is an exception, precise data are hard to come by. Because the testing companies are privately held, they are not bound to give information out. Conservatively, though, it's safe to assume the industry is probably generating about $100 million to $200 million annually in sales, with major corporations accounting for a big portion. The two major uses are in hiring and in management training and development.

How do companies use psychological testing, and is there any evidence that it increases profits? Large retail companies like Home Depot use personality testing to screen out dishonest employees in the hiring process. These tests are highly effective, but at times, honest but cynical people do get erroneously screened out. In the financial sector, testing is widely used to determine who will be the best salesperson or stockbroker. Salespeople can and do fail, and they get terminated for not scoring high enough on extroversion. To the extent that large profit-driven companies spend a lot of time and money in employee screening and in management training and development, they definitely find it is effective. Some studies have looked at results of integrity and honesty testing, and it does seem to be accurate. But there is not a huge amount of hard data. The test providers are reluctant to undertake those studies because they may undermine their products. This doesn't mean that the tests don't work; it merely means the companies are reluctant to expose their test to that kind of outside scrutiny. One big exception is the MBTI, which has generated thousands of studies. The studies generally have been psychological, rather than business-oriented. The studies do not tell us whether certain companies are more profitable because they used testing.

Can a small business with 2, 10, or 20 employees use psychological testing effectively? Absolutely. You are focusing on the cutting edge when you talk about and show small companies how they can use testing. I am sure small businesses over the next decade will start to see its value and will start using testing to help understand employees and to increase job satisfaction, motivation, and productivity. There are four tests that would be helpful for a small business to use. But I do have some caveats before telling you about them. If a business owner does not have a background in psychology, it might be worthwhile to hire a psychologist--not to give the tests but to provide a couple of hours of consultation about what the tests will do and how to understand them. Most small businesses cannot afford to hire a psychologist for dozens of hours. But there are hundreds of assessment Web sites and thousands of tests, many of dubious validity. There are a lot of charlatans out there, and getting some professional assistance is wise. Before any small business owner decides to go ahead, he should hire a psychologist with expertise in testing. The couple of hours of consulting will allow an expert to explain what the tests are, their value, their limitations, and how they can be used. A small insurance business might want to attract different personalities than a financial planning firm. So you need some consulting to help you understand what kind of people you want and do not want in your company, and what the issues are with the employees you currently have on your staff.

Since we know the most about the efficacy of MBTI, please tell me about it. MBTI is a very good test. More than a million people take MBTI annually and there are excellent reasons why it is the most popular personality test in business in the world today. It sheds light on important dimensions of our personalities and how they affect our performance at work. Better tests can and will be developed. But it is easy to take. It takes no more than 20 minutes. It gives results that are interesting and significant.

What does MBTI measure? How each of us stands with regard to four major dimensions of personality. The first is whether you are an introvert or extrovert. If you're an extrovert, you get energized by being in groups and in crowds, and it's easy for people to read your emotions. It has nothing to do with how likable you are, how many friends you have, whether you're kindly. What make this concrete for everyone is that the opposite is what makes us feel drained. Some people feel drained by working in a group for several hours, and others feel drained by working alone. This trait of getting excited by having other people around is important in business, and there's no doubt that extroversion is an important personality trait. Companies in the investment field see this as a very important trait. Extroversion is the single most difficult personality trait to change. In general, psychologists believe it is difficult to change our core psychological traits. The four dimensions of personality are inborn and don't change easily. By the time we're 18 years old, they won't change at all. The only limitation of the MBTI--and, ironically, what makes it unique--is that the results are dichotomous. You're either one thing or the other. Most tests don't have that, and it doesn't make much sense to us because, as a psychologist, everything can be seen on a continuum.

What are the other traits measured by MBTI? How you gather information--whether you're fact-oriented and sensing or intuitive and prefer your imagination to the mundane. People who are sensing gather information based on objective facts. Then, there's the thinking-versus- feeling dimension of personality. After you have facts and must make a decision, are you more concerned with letting chips fall where they may? Or are you more concerned with not hurting people's feelings? The fourth dimension MBTI measures is judging or perceiving. Judges [like things to flow] in an orderly manner; they like schedules and routine. If, on the other hand, perceiving is your personality trait rather than judging, then you tend to act more on impulse and value spontaneity. Altogether, there are 16 personality types--16 different combinations of the four traits. This fourth dimension is most important in terms of team building and causing conflict among staff. When people are different on the last dimension, judging versus perceiving, it causes the most conflict among employees.

Tell me about the Kolbe Index. I did some work with Kathy Kolbe as a psychological consultant several years ago and [I took] her two-day training seminar. She says, and she is right, that the Kolbe A Index is not a personality test. It is a test of problem solving. So it is different from MBTI. The test is very intriguing. It has face validity, which means it looks like it is measuring what it says it will. But unlike the MBTI, which has been studied by graduate students and professors around the world, it has not been studied very much. The research conducted by her own company, while useful, has appeared minimally in peer-reviewed scientific journals.

Go through the four tests you believe advisors can use to better manage their staff and hire employees. MBTI is definitely one of them. Another good test that is not very well known outside of academia is the Hogan Personality Inventory (HPI). It provides information on different dimensions of personality including ambition, likeability, and sociability. What's very important is that it measures an individual's likeability or agreeableness.

What are the other tests you think readers would benefit by using? Kolbe. While it is more expensive than the others, and it is hard to justify $49.95 when the MBTI is selling for $20, it does give you information you don't get in other tests because it looks at your problem-solving style. It has some value in putting together teams but I think the value is in understanding the work style of employees. The other test I think could be valuable to your readers is an intelligence test called the TONI-3. It's a test of nonverbal intelligence. By being a nonverbal test, it gets around ethnic biases. You cannot give a standard IQ test for ethical and legal reasons because it could be discriminatory. But this test is accepted by the federal government. You probably need a consultant to interpret the results.

Specifically how should readers use each of these tests to hire and manage people? If they're looking for a salesperson, the person's score on extroversion is the most important dimension. For hiring a salesperson, you might want to give candidates an MBTI to see how extroverted they are. You probably do not need Kolbe or the intelligence test. If you are hiring a portfolio manager, then the Kolbe A would become relevant because you want someone oriented toward detail and who is good with numbers. MBTI would also give you the person's judging-versus-perceiving dimension, and could be helpful in allowing you to avoid hiring someone who is impulsive. If you are looking for a marketing candidate, you probably want someone who comes up with new ideas, and the Kolbe and MBTI could cover you. You won't need an IQ test if you have a college transcript because that should give you a clear idea of the candidate's intellect. If you are hiring a support staffer who handles portfolio downloads and clerical tasks, a TONI-3 would give you a good handle on their intellectual ability. The MBTI could give you good information about thinking versus feeling. The Kolbe probably would not be vital for that job because there's not a wide range of options for a support staff person to do over the course of the day. The work is well structured. The Kolbe becomes more important at the professional level when the work is open-ended. Then, you want to know how the person attacks problems.

Editor-at-Large Andrew Gluck, a veteran personal finance reporter, is president of Advisor Products Inc. (www.advisorproducts.com), which creates client newsletters and Web sites for advisors. Advisor Products may compete or do business with companies mentioned in this column. He can be reached at agluck@advisorproducts.com.

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