Bad at Math? You’re Screwed

by JT McGee

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?

{ 4 comments… read them below or add one }

Bob @ Cubicle Sherpa June 28, 2013 at 14:38

Even simple math has saved me hundreds of dollars. Last year I bought a car from a dealership. They manually wrote out the bill of sale and “accidentally” added the numbers wrong. The total they wrote down was about $400 higher than the sum of my charges.

Luckily I don’t sign anything without double checking the math. Five minutes and some simple addition saved me a few hundred bucks.

-Bob

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Frank June 29, 2013 at 04:36

JT I found this article to be true in its entirety. Having worked as a restaurant server I had the opportunity to see many business men having difficulty figuring out 20% of the bill to give as a “tip”. I found it amazing how people get confused when it comes to making a money decision for themselves, but they find it easier if it was somebody else’s money.

The same can relate to investments, the psychological part of it is the hardest to control. I believe behavioral finance is something we all need to devote a little more focus on mastering.

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Squirrelers June 30, 2013 at 13:02

It is simply mind-boggling how some people can function with poor math skills. My mind is always working in terms of thinking mathematically, in a wide variety of situations. Thankfully my kids are good at math too, I’ve made sure to work with them regularly.

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JoeTaxpayer July 1, 2013 at 13:45

Fixable? I hope so. Call me old fashioned, but the introduction of calculators into grade school is a sin. In 8th grade math, it’s fine that jane is X years old that her brother but will be twice his age, yada, yada, but how about introducing financial math early on in grade school?
I recall a news story of a teacher getting let go for offering problems based on the price of cocaine and marijuana. He was fired, of course, but I immediately thought the guy was just burned out. No parent will take offense if my math problems talk about having $X to buy a fast food meal or combinations of clothing at certain prices. In 9th grade, balance a checkbook. I bet the local bank will donate a case of check registers to the cause.

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