Wealth Finance

Here’s more evidence of the importance of having solid math skills in the real world. The Economist recently reported on an intriguing paper from the Federal Reserve Bank of Atlanta. The authors surveyed a sample of subprime borrowers in Connecticut, Massachusetts and Rhode Island who obtained mortgages in 2006 and 2007, and tested the participants’ financial literacy and cognitive ability with a series of questions and quizzes.

Their findings: Borrowers who scored lowest on the math test were more likely to default on their mortgages than those homeowners who aced the test. Twenty percent of the borrowers with low math skills experienced foreclosure, compared to only 5 percent of those with strong skills. And borrowers with limited math ability are behind on their mortgage payments 25 percent of the time, while those with the best are behind approximately 10 percent of the time.

As the authors note: “The inability to perform simple mathematical calculations is likely to negatively impact a borrower’s ability to manage a household budget. In addition, such an inability may adversely affect the borrower’s ability to choose the appropriate type of mortgage given his or her current financial status and expected future financial situation. Both of these scenarios would likely put a borrower at risk of falling behind on his or her mortgage.”

What’s striking is that limited numerical ability—not general smarts or economic literacy—was both common and more strongly linked to mortgage defaults than
“financially illiterate borrowers taking on too much debt, or choosing excessively risky mortgages.”

This is yet another reason why teaching kids about money should be a top educational priority. And in case you’re wondering how you’d fare, take the quiz. There’s nothing about derivatives and credit-default swaps here, just basic arithmetic.—Desiree Ferenczi

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