A new study finds the obvious: those who are bad at math make poorer personal finance decisions. More specifically, “math-challenged borrowers are 5 times more likely to lose their home.”
While I haven’t dug into the study, the article claims that biases surrounding socio-economic conditions and general intelligence were removed. Researchers wanted to focus entirely on mathematical abilities.
It’s well documented that the more math you know, the more money you can make. Look at engineers, doctors, actuaries, and world-renowned poker players.
From the article:
The study examined several hundred borrowers who held mortgages issued in 2006 and 2007 — right before the mortgage meltdown. Of the study subjects, 25% of the borrowers who scored in the lowest bracket for math skills had defaulted on mortgage payments within five years of getting the loans. Meanwhile, only 5% of those in the top tier for math skills defaulted.
This study also backs up my view that the general population loses 50 IQ points when a number follows a dollar sign. The questions used to test mathematical abilities were not difficult:
The simplest question asked them how much a $300 sofa would cost at a half-price sale. The most difficult asked how much a savings account of $200 would grow to after earning 10% interest for two years.
I would love to see the results of the same test if they asked “What is half of 300?” or “What is 1.1^2*200?” Part of the problem may just be that Americans have a really hard time converting the English language to mathematical language?
An anecdote: I remember “story problems” being atop the least favorite questions among my peers in math classes. (I actually favored them, since context is everything.)
This development doesn’t surprise me at all, but it does fly contrary to personal finance education, which stresses behavior over mathematics. Personally, I find making a decision based on numbers is easier than correcting my own poor behavior as observed by someone else. One of these days we might wise up and make mathematics a very central part of personal finance education.
Readers, this is a huge problem. Is it fixable?