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Related Experiment Videos

Numerical ability predicts mortgage default.

Kristopher Gerardi¹, Lorenz Goette, Stephan Meier

¹Research Department, Federal Reserve Bank of Atlanta, Atlanta, GA 30309, USA.

Proceedings of the National Academy of Sciences of the United States of America

|June 27, 2013

Summary

Poor numerical ability is linked to higher rates of subprime mortgage default. This finding suggests that individuals with limited math skills may struggle with mortgage payments due to behaviors beyond their initial loan choices.

Keywords:

consumer finance foreclosure limited rationality subprime loans

Related Experiment Videos

Area of Science:

Behavioral Economics
Financial Literacy
Cognitive Science

Background:

The 2008 global financial crisis was largely triggered by US subprime mortgage defaults.
The underlying causes of these widespread mortgage defaults remain unclear.
Understanding factors influencing default is crucial for financial stability.

Purpose of the Study:

To investigate the relationship between numerical ability and subprime mortgage default.
To determine if cognitive skills, specifically mathematical aptitude, predict mortgage default risk.
To explore the mechanisms through which numerical ability might influence mortgage outcomes.

Main Methods:

Survey data on financial literacy and cognitive ability of subprime borrowers (loans from 2006-2007).
Matching survey data with objective administrative data on mortgage characteristics and payment histories.
Statistical analysis controlling for sociodemographic variables and other cognitive abilities.

Main Results:

A significant negative association exists between basic mathematical ability and mortgage default propensity.
This relationship remains robust after controlling for various sociodemographic factors.
Numerical ability does not appear to influence default through the selection of mortgage contracts.

Conclusions:

Limited numerical ability is a key factor associated with subprime mortgage default.
Individuals with lower mathematical skills may exhibit behaviors leading to default, independent of their initial loan choices.
Findings highlight the role of cognitive skills in financial decision-making and stability.