More Numerate Couples Enjoy Greater Family Wealth

Couples who score well on a simple test of numeracy ability accumulate more wealth by middle age than couples that score poorly on such a test. That is the conclusion of a study of married couples in the United States, published in the November 2010 Economic Journal.

The research by Professors James P Smith, John McArdle and Robert Willis finds that when both spouses can answer three numeracy-related questions correctly, family wealth averages $1.7 million. Among couples where neither spouse answers any questions correctly, the average household wealth is $200,000.

The researchers examine several cognitive skills and find that a simple test that checks an individual''s numeracy skills is a good predictor of who would be a better family financial decision-maker. Numeracy is the ability to reason with numbers and other mathematical concepts, skills typically learned at school.

The study finds that choosing the wrong person as a family''s primary financial decision-maker can have consequences. While families choose the less numerate spouse less than 20% of the time, when this does happen, total household wealth is lower.

The study also finds that:

  • As the numeracy score of each spouse rises, the percentage of a family''s portfolio held in stock market investments increases.
  • A man is the financial decision-maker in 62% of households. This male preference is particularly pronounced when the husband is older and more educated than his wife.
  • Selection of the husband as the financial decision-maker is more sensitive to a husband''s numeracy ability than it is to the numeracy skills of the wife. Even when a husband scores zero in his numeracy test, there is essentially a 50-50 chance that he will still be selected as the financial decision-maker.
  • The male bias in choosing the financial decision-maker has been declining over time so that it is smaller among younger couples in the 50-plus age range.

The study analyses a sample of married couples from the Health and Retirement Survey, a nationally representative survey of Americans at least 50 years old. The survey, which is funded by the National Institute on Aging, includes high-quality measurement of family wealth and tests of cognitive ability of both husbands and wives.

Researchers say that the skills needed to make successful investment choices are among the most cognitively demanding that families have to make, especially as people get older and assume greater control of decisions about their wealth, pensions and health care.

This study is one of the first to examine who makes these financial decisions for a household, how that selection is influenced by couple''s personal attributes and the relative cognitive abilities of both wives and husbands.

In addition to studying numeracy skills, the study also examines the impact that other cognitive skills, including memory retrieval and intact mental status, may have on financial outcomes. The researchers find that these other cognitive functions have far less influence on a household''s wealth.

 ''Financial Decision Making and Cognition in a Family Context'' by James P Smith, John McArdle and Robert Willis is published in the November 2010 issue of the Economic Journal.

The research was supported by grants from the National Institute on Aging to RAND, the University of Southern California and the University of Michigan.