If someone said to you that not paying attention in math class and copying the nerd’s math homework in high school, will one day influence your likelihood of losing your home, would you have believed them? And yet that is exactly what recent research seems to show! Several research studies now show that those with poor math skills or numerical ability are at a greater risk to default on their mortgages and in turn lose their homes.
In 2008 most of the western world was thrown into a deep recession which had global repercussions. Since the recession started there have been many enquiries about the reasons behind it. Why did so many people default on their subprime mortgages in the US and set in motion the biggest global financial crises since the Great Depression? Researchers Gerardi, Goette and Meier, set out to answer this question and found that the numerical ability of mortgage borrowers influences their financial decision-making. Those with low numerical ability are at a higher default risk. In other words, those who had bad results on basic math skill tests were more likely to be behind on their mortgage repayments.
In this study the researchers measured several aspects of the mortgage borrowers’ financial literacy and cognitive ability and matched it with their personal administrative data, the type of mortgage and the payment history. What they found was that numerical ability does not really influence the type of mortgage that the borrowers took out but rather influence their behaviour after they have already signed the mortgage contract. Those with low numerical skills had financial behaviours that got them into serious trouble, like having trouble following a budget, or choosing unstable employment contracts, or having too little savings. Other financial decisions were influenced by the borrowers not really understanding the consequences of certain decisions like credit card use and abuse. All these suboptimal choices that they make after the contract has commenced make them more vulnerable to a financial shock which put them at a higher risk for default.
Interestingly, people with a low numerical ability score, does not necessarily score low on IQ tests or economic literacy (like understanding and knowing about financial concepts). Higher IQ does not prevent households from falling behind on payments but it does help them to avoid foreclosure perhaps because of their ability to strategize better. Another study done on the link between math skills and mortgage default supports these findings and they conclude, ‘An important finding is that it is specifically mathematical skills, as opposed to other dimensions of cognitive ability, that appear to matter for financial decision making’. Financial education programs that teach math skills in addition to financial concepts will have positive effects on the ability of mortgage borrowers to stay on track with payments.
The lesson that should be learned from these studies is that you should concentrate in math class, and if you didn’t, then it would be advisable to sharpen up those math skills, it might just save your house!
At the same there are numerous studies shows that those who mastered the english language do well in their career than other language speakers.