Behavioral financial bias | Manila Times

The pandemic has indeed accelerated the adoption of digital financial services. According to the Financial Inclusion Survey 2021 by Bangko Sentral ng Pilipinas, 60 percent of those who performed online financial transactions such as money transfers and payments jumped from 17 percent in 2019 to 60 percent in 2021. The report also showed that the number of Filipino adults with financial accounts increased from 20.9 million in 2019 to 42.9 million in 2021, indicating an improvement in financial inclusion in the country.

But that’s half the battle won. The financial literacy record of the Philippines remains dismal, with a 2022 World Bank report showing the Philippines’ financial literacy score of 25 percent, much lower than its neighbors Singapore (59 percent) and Malaysia (39 percent). Financial literacy includes a set of skills and knowledge that enable an individual to make informed decisions about their financial resources.

Differences in financial literacy across countries are attributed to a field of research known as behavioral finance, which claims that there are behavioral anomalies that cause people to judge poorly when it comes to personal finance.

In my conversations with different types of investors, both individuals and my students, I have identified four behavioral anomalies that are common among Filipinos:

herd behavior

Herding behavior is the tendency of individuals in a group to act collectively, like animals in a herd. This is probably the most influential factor when it comes to making personal financial decisions among Filipinos, brought on by our culture of “me too” copying and emulating our friend, neighbor or colleague, be it in business, personal possessions and even investments.

A prime example is how thousands of Filipinos fall prey to investment scams that promise high returns, from the likes of the Multitel and Emgoldex fiascos in the 1990s and 2000s to the bitcoin and crypto scams of today. Fraudsters continue to rebrand and at the same time become victims of even educated people.

Even in the stock market, some major stock market trends begin and end with periods of frenzied buying or selling. One of my former students invested in an IPO of a little-known company because his boss and colleagues put their money into it, only to lose a lot because the company didn’t have a solid foundation.

This is a problem of herd behavior. People are jumping on the train without fully understanding where their money is going or how it is being invested.

Bias confirmation

Confirmation bias is the tendency for people to choose one-sided information that supports their opinion while ignoring the rest, leading to faulty decision making. Much of this behavior is cultural or deeply rooted beliefs, such as the tendency of many Filipinos to keep their money at home or in a baul (chest) because their parents saved it that way, or the fear of not getting insurance due to bad experiences in past decades. characterized by the closure of deliberate companies.

In addition to herd behavior, confirmation bias explains why people who dove into investment scams cling to them and succumb to hiya (shame) or avoid losing face; therefore, they selectively listen and heed the “success” stories of fake investors rather than the conflicting advice of others.

mental accounting

It refers to the tendency for people to divide their money into groups of “mental” accounts based on a variety of subjective criteria, such as the intended use of each account or the source of the money. This often leads to irrational and harmful decisions when it comes to money.

One example is the high credit card debt among Filipinos, which leads to many non-payments. People often have a special “fund” set aside for a vacation or a new gadget, but still have significant credit card debt. Many simply pay the minimum monthly payment on credit cards, which makes the debt appear to be for life.

In this example, it doesn’t make sense to save money for vacations or gadgets that earn no interest at all, yet carry a 20 percent annual interest rate on credit card debt.

In the field of investing, the classic teaching among novice stock and bond investors is to separate their investments into safe (bonds) and speculative portfolios to prevent the negative returns that speculative portfolios can have, affecting all investments. In many cases, despite all the money an investor spends on two separate portfolios, his or her net worth will be no different than if they only held one large portfolio.

Player error

It is the human tendency to mistakenly assume that certain random events are less likely to occur after an event or series of events. This thinking is erroneous because past events do not change the likelihood that certain events will occur in the future.

Many lottery bettors find that over time and the longer they bet on the lottery, the better their chances of winning. Even classic casino, horse racing, and cockfighting players believe that the more they lose, the closer they are to winning; therefore, bet a little more to lose all your monthly income.

Many small business owners also fall into this trap of continually investing in a loss-making venture, believing that successive losses can eventually drive up revenue.

After all, changing this abnormal behavior requires a national education strategy and ongoing education for Filipinos from elementary school through adulthood.

The author is the founder and CEO of Hungry Workhorse, a digital and cultural transformation consulting firm. He is the Chairman of the Finex Academy’s IT Management Committee. He is a fellow at the American Institute for Digital Transformation. He teaches strategic management at De La Salle University’s MBA program. The author can be emailed [email protected]