Numerophobia

by Team Dinks on May 18, 2010 · 1 comment

retro dollar signs

Numbers? Ahh!

Recent work highlighted in this week’s Economist showed that, after accounting for a whole host of differences between people who took out “sub-prime” mortgage during the run up to the housing finance crisis, the defining variable that predicted whether or not these people would miss payments, default, or be foreclosed upon came down to their degree of innumeracy (numerical literacy).

I recall from my schooling days, and I imagine it is true today as well, that math isn’t most people’s favorite subject, so once you learn the basics (add, subtract, multiply, divide), there isn’t much of an interest to go further (say, into ratios or calculus or trending).  Math just isn’t taught in a fun way, and I bet this contributes to innumeracy (Check out Dan Flockhart’s attempt to merge fantasy sports and mathematics in high schools).

Innumeracy is not limited to high school dropouts, I see this innumeracy amongst friends and colleagues who hold advanced degrees. The ability to understand a slight bit more about numbers may be a difference between successful homeownership or foreclosure, between a strongly performing savings and investment portfolio, and one where the rabbit is chased but never caught.

The economists doing this research came to a strong conclusion supporting the development of a “small pot of savings” for families starting out with homeownership.  Many DINKs readers probably think  “We know the value of having an emergency fund!”, but economists are now fleshing out just how important a small fund has on a household.  It’s a shame it took a housing crisis to understand the importance of the emergency fund, or the importance of strengthing our comfort with numbers.

Our government maintains a personal finance clearing house  website, mymoney.gov .  I attended a meeting 2 years ago on the development of this website and its nice to see our suggestions were incorporated into the previously bare-bones website which is now user friendly.  This website is huge and filled with personal finance research  done by many federal agencies.  If there’s a question you have, odds are consulting the research here is an excellent, and free, start. If you want to begin improving your financial numeracy, I’d start here.

If you want to test your numeracy, take the quiz!
(Your resident DINKs economist scored 5 for 5.  Whew)

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{ 1 comment… read it below or add one }

1 Laura Adams May 19, 2010 at 7:28 am

Very interesting article. I’ve also noticed that my math-deficient friends seem to make poor financial choices, even though they’re very smart or skilled in other areas. Math gives us the ability to analyze financial choices in a pure way that isn’t influenced by emotion.

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