Subprime mortgage lending aside, perhaps we could have avoided 2008's widespread housing crisis if only homeowners had paid a little more attention during math class.
That's the case made in a new study by a trio of Princeton University researchers, who say they've found evidence that people who can't perform basic math calculations are more likely to default on their mortgages.
First, they tracked down 300 homeowners who took out subprime mortgages in New England in 2006 and 2007. Then, the researchers did some digging to find out more about their financial situation, including their household income, age, education, marital status, and credit score.
Then the real fun began.
They asked them five simple math questions, which "got more and more complicated," study author Stephan Meier, an associate professor at Columbia Business School, told Phys.org. "The simplest one was: There is a sofa that costs $300 when it's full price, and it's on sale for half the price. How much is it on sale?"
Another question asked: "T here's a disease, and the probability of getting the disease is 10 percent. How many people out of 1,000 got the disease?"
The study found that 20% of people who scored low scores on the math questions wound up in foreclosure, compared to just 7% of people who scored high.
Interestingly the study also found that a person's credit score carried little weight when it came to predicting their ability to meet mortgage payments.
The researchers expected to find evidence that people with poor math skills would have a harder time understanding the terms of loan agreements, thus leaving them more likely to sign up for a bad loan; but it turns out the real reason they were more likely to default was because they had a harder time dealing with other personal finance issues, like dealing with a lost job or depleted savings.
Obviously, it takes two to tango, and there's no denying that the subprime mortgage lending fiasco played a large role in the housing crisis. But there's something to be said about consumers who put in the time to learn the ins and outs of personal finances early enough to prepare themselves for disasters before they strike.
Check out the study, "Numerical ability predicts mortgage default," by Kristopher Gerardi, Lorenz Goette, and Stephan Meie here: www.pnas.org/cgi/doi/10.1073/pnas.1220568110
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