The report, ‘Numeric Ability Predicts Mortgage Default,’ by Kristopher Gerardi of the Federal Reserve Bank of Atlanta, Lorenz Goette of the University of Lausanne's economics department and Stephan Meier of Columbia University's Graduate School of Business, presents "empirical evidence" that people with poor math skills are more likely to enter default or foreclosure.
The research is, in part, based on a survey of 339 people, all subprime borrowers who took out mortgages in 2006 and 2007, who were tested on their basic math skills. The paper finds that borrowers with low numerical ability did not necessarily fall for poor deals when securing a loan; rather, they defaulted "due to behavior unrelated to the initial choice of their mortgage."
In establishing the relationship between poor math sills and mortgage delinquencies and foreclosures, the paper exposes "the other side" of the mortgage issue as it relates to the subprime meltdown of 2008: "Why were so many borrowers willing to take out mortgages that they could not repay?"
While the relationship between math skills and mortgage default might seem obvious, the report reveals trends that one might not expect. For example, the people with poor math skills still scored high on IQ tests, thus debunking the theory that low overall intelligence is what drives poor financial decision-making.
Further the research finds that there is no relationship between education, income, credit and other socioeconomic characteristics that would make people more likely to default on their mortgages – in other words, numerical ability alone, regardless of overall intelligence or other socioeconomic factors, is the primary driver of mortgage default.
To download the report, click here.