One of the tools of credit analysis is evaluating the 5C’s namely, character, capacity, condition, capital and collateral. The first C is character which refers to a borrower’s commitment to pay according to the terms of the agreement. It represents  the borrower’s willingness to pay and attitude towards settlement of debt.

If you are thinking of lending someone with money, you are choosing to trust. It is  a decision which  requires a readiness to have faith in the other. To evaluate an individual’s character, the financier will review management background, experience, reputation in the financial community and the borrower’s risk-taking attitude on business. This is part of the due diligence process, knowing the client through a thorough background investigation.

In essence, this is looking at past records in order to assess the future. For the borrower, it is thus imperative that he has built a financial footprint that will allow such verification. Absence of such records, the borrower is placed at a disadvantage.

In a classic Harvard Business Review article, however, David DeSteno asserts that “we place too much emphasis on reputation and perceived confidence, ignoring the fact that human behavior is always sensitive to context and can often be better assessed by our own intuition”.

According to DeSteno, most people use reputation as a proof for integrity. But contrary to common belief, integrity isn’t a stable trait. Someone who has been fair and honest in the past won’t necessarily be fair and honest in the future.

Research shows that in experiments on cheating, 90% of people – most of whom consider themselves as morally upstanding – will act dishonestly to benefit themselves if they believe they won’t get caught. Anonymity means no long-term cost will be exacted. Trustworthiness depends on circumstances. The mind focuses on short term and long-term gains and the trade-off between them will dictate behavior.

Another concern is power. Research at Berkeley by social psychologist Paul Piff suggests that indicators of socioeconomic status can predict trustworthiness. Increasing power and status go hand in hand with decreasing honesty and reliability. So, are the rich less trustworthy than the poor? Another study at the University of Cologne by psychologist Joris Lammers reveals an important dimension.  A person’s honesty depends on his or her relative feelings of power or vulnerability – not on how much he or she has in the bank. The study simply validates the old adage that power corrupts. The power differences, whether real or imagined, affects behavior, calculating in the mind whether one needs another more than he needs you.

Confidence is another area one must be wary of before giving trust. It is a very enticing trait that we are led to trust people who sound and appear confident. However, confidence cannot make up for competence. Here, reputation and background check can be very helpful to ensure that the  aura is not deceptively masking real capabilities.

So, while we can rely on the tools of the trade like credit investigation, background check and homework in assessing the character of a potential borrower, the astute lending officer should not fail to infer good intentions from other cues, including intuition. According to psychologists, our minds have built in trust detectors which we should tap in dealing with potential clients.

DeSteno writes about four non-verbal signals that someone cannot be trusted when occurring together-- leaning away from a partner, crossing one’s arms, hand touching and face touching. This was discovered in filmed experiments on people doing face to face chat before an economic game that pitted self-interest against cooperation.

All these do not suggest that intuition alone can lead to good judgment. But it is an important variable that cannot be ignored. In other words, do the necessary due diligence. Then combine this with understanding the context and circumstance of the counter party’s situation. Read non-verbal cues.  And make sure the transaction is structured to consider human behavior in the light of the short and long run benefits to the parties.

In an article in Psychology Today, Dr. Melanie Greenberg suggests stepping back and taking time to think before making choices on whom to trust. Don’t make important decisions on impulse. She proposes the  concept of a “wise mind” coined by psychologist Marsha Linehan. The concept describes a state of mind that integrates logical thinking with emotional awareness. It is a mindful state that combines  different ways of knowing. The wise mind integrates our intuitive reactions with the wisdom of experience and knowledge about the world.

(Benel D. Lagua is former  Executive Vice President and Chief Development Officer at the Development Bank of the Philippines.  He is an active FINEX member and an advocate of risk-based lending for SMEs.  The views expressed herein are his own and does not necessarily reflect the opinion of his office as well as FINEX.) [email protected]