Was innumeracy a factor in the recent housing bust?

Here’s an interesting research article that I found by way of this article in the Economist: “The Fear of All Sums” (May 13, 2010). The authors of the paper found a strong correlation between individuals with poor math literacy and individuals who were delinquent on their loans in the recent housing bust, and this result was robust even when controlling for age, ethnicity, level of income, FICO score, highest level of education, and other sociodemographic variables. Furthermore, the authors of this study found that people with poor math literacy were not more or less prone to enter into subprime mortgages than people with high math literacy. The reason suggested by the authors for the difference in mortgage delinquency is that people with poor math literacy are not as good at managing their daily finances.

Here are the five questions that they used to measure math literacy:

  1. In a sale, a shop is selling all items at half price. Before the sale, a sofa costs $300. How much will it cost in the sale?
  2. If the chance of getting a disease is 10 per cent, how many people out of 1,000 would be expected to get the disease?
  3. A second hand car dealer is selling a car for $6,000. This is two-thirds of what it cost new. How much did the car cost new?
  4. If 5 people all have the winning numbers in the lottery and the prize is $2 million, how much will each of them get?
  5. Let’s say you have $200 in a savings account. The account earns ten per cent interest per year. How much will you have in the account at the end of two years?

I’m curious to see how my students will do on these questions. I feel a sense of personal responsibility that even if students aren’t going to learn Algebra 1, Geometry or Algebra 2, that I try to help them raise their basic math literacy skills.

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