By Will Corbin, Project Associate.

I recently read a very interesting article (see footnote 1) regarding the association between numeracy (the ability to reason with numbers and mathematical concepts) and people who fell behind on their mortgage payments during the recent housing meltdown in the United States. According to a working paper from the Federal Reserve Bank of Atlanta (see footnote 2) , even when accounting for differences in income levels, credit scores, and attitudes towards risk, individuals who fell behind on their mortgages were noticeably less numerate than those who were able to keep pace with their payments. The paper investigates whether numeracy may have played a role in the enormous number of defaults and foreclosures seen over the last few years in the U.S. subprime mortgage market.

About one-fifth of the least numerate group of people in the study had been in foreclosure, compared to only seven percent of those who were more numerically proficient. The most shocking aspect of this study is that, according to The Economist, the least numerate people were not actually making loan choices that differed that significantly from their peers. In fact, they were about as likely to have a fixed-rate mortgage as those who were more numerically skilled. In addition, these people did not borrow a larger share of their income, and loans were about the same portion of the house’s value.

According to Stephan Meier, one of the study’s authors, “the innumerate may be worse at managing their daily finances, leaving them with little room” to maneuver when they hit rougher financial times.

This begs the question, “why are personal finance courses not required to graduate from high school?” In my experience, besides that one short middle school assignment in balancing an imaginary checkbook, I do not remember taking any class about personal finance; nor was this subject integrated into any math class throughout my twelve years of primary and secondary education.

It seems to make perfect sense (especially in a society such as America’s, which claims to value personal responsibility so much) that the subject of personal finance would be focused on and made into a staple of the American student’s academic curriculum. However, this is far from the truth. The Council for Economic Education, in their 2009 Survey of the States study (see footnote 3) , noted that only 13 states (see footnote 4)require students to take a Personal Finance course (or Personal Finance included in an Economics course) as a high school graduation requirement. This is up from a paltry seven states in 2007 and one in 1998.

At Market Street, when we help create economic strategies and plans, we truly take the entire community, as a whole, into consideration. This includes population dynamics and education, both vital indicators of a community’s socio-economic health. The education of America’s youth in the intricacies of personal finance is one of the many small but very effective methods that could contribute to the successful economic development of the nation. In addition, as we can see, proper education in personal finance may also go a long way in helping to prevent an enormous housing market collapse (and the accompanying mortgage defaults and foreclosures) to the extent that was witnessed during the Great Recession of the 2000s.

If you would like, you may take a shortened version of the numeracy quiz that the authors administered to their sample of borrowers here:

http://www.economist.com/diversions/quiz.cfm?quizname=numeracyquiz130510

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(1) The fear of all sums: The role of mathematics in America’s Housing Bust, The Economist, May 15, 2010.

(2) Financial Literacy and Subprime Mortgage Delinquency: Evidence from a Survey Matched to Administrative Data, by Kristopher Gerardi, Lorenz Goette, and Stephan Meier, April 2010.

 

(3)Survey of the States: Economic, Personal Finance & Entrepreneurship Education in Our Nation’s Schools in 2009

 

(4)Arkansas, Georgia, Idaho, Illinois, Louisiana, Maryland, New Jersey, New York, Oklahoma, South Dakota, Tennessee, Utah, and Virginia