Study links poor grasp of maths to higher probability of bond default
PEOPLE who are poor at maths are more likely to be behind with bond payments and have their homes repossessed, according to a study.
It shows the risk of defaulting on a bond is linked directly to a home owner’s maths skills and could explain defaults in the recent global crisis.
Professor Lorenz Goette, its author, urged lenders to offer “mortgage counselling” to those who struggled with maths.
“Anyone can screw up, whether they are rich or poor,” Professor Goette at the University of Lausanne, in Switzerland, told The Times.
“We need to think about whether we can teach people to avoid these mistakes.”
The study, published in the Journal Proceedings of the National Academy of Sciences of the US, indicated owners’ poor maths skills could have contributed to the bond defaults that led to the recent global financial crisis.
It questioned 339 subprime borrowers in the US who took out loans from 2006 to 2007, and assessed each individual’s numerical ability in a telephone survey.
Questions involved calculating percentages and the basics of compound interest.
Goette said: “It’s quite surprising how many people get these wrong.”
Borrowers who did least well at the maths test spent about 25% of the time in arrears on their house bond payments compared with only 12% for the top group.
The results were not simply explained by people who were good at maths also being better off.
Scores of economists said that people with poorer numerical abilities appeared to have got worse bond deals.
But that explained only about one-third of differences between the best and worst-performing groups, they said.
Budgeting problems and an overall lack of understanding of the mortgages they had taken out were also likely to have played a part, the researchers concluded.
Goette said: “It’s always possible for people to spend too much, regardless of their income.
“Recent studies have found changes in financial education curriculums in high schools have important effects on finan- cial decisions later in life, that foreclosure counselling can reduce incidences of foreclosure and mathematical skills in general may be more malleable and less genetically driven than previously thought.
“If financial education can reduce sub-optimal financial decision making, this could have profound effects on household behaviour, as suggested by our results,” Goette said. — © The