BY BRIAN JERIC MORILLO, IDEA
Financial literacy and information asymmetry
THE GOOD NEWS is that Filipinos are now more adept at managing their
finances. The bad news is that the Philippines' financial quotient still
lags behind its regional peers. These were some of the findings of the
most recent Financial Quotient (Fin-Q) Survey by international financial
services conglomerate, Citi.
In previous years, financial literacy among Filipinos has always fallen
below the 50-point mark out of a perfect score of 100. The Philippines
recorded its lowest grade in 2008 when it got an overall score of 46.6
points. This year, however, showed a notable improvement as the country
crossed the halfway mark of the Fin-Q Survey for the very first time at
52.6 points. Moreover, the survey indicated that six out of ten
Filipinos feel that they have a "good" or "very good" grasp of money
management. Similarly, four out of five say that they are "optimistic"
about their financial future.
Though the score is still behind the regional score of 54.5 points, the
numbers suggest that Filipinos are now more concerned about planning
their personal finances while at the same time trying to improve their
financial security. Filipinos are now saving more, managing credit,
seeking investments and spending on insurance. This is, however, just
the first step in improving the financial security of Filipinos.
While the management of finances is geared towards achieving financial
security, individuals who have not been properly educated just might
suffer losing their lifetime savings. This is especially true when
dealing with investment vehicles. Saving is one part of the process and
where to put one's money is another question. Of the two aspects, the
latter will pose potential problems. An individual has to know the
different levels of risk associated with diverse potential investment
vehicles on which he or she will put money on.
What is more problematic, however, is the underlying issue of what is
called the "principal-agent problem." This situation can lead to "moral
hazard" situations, defined by R. Pindyck and D. Rubifeld as a problem
that occurs when the unobserved actions of an agent affects the
probability or magnitude of payment to the principal. These unmonitored
actions by the agent (the organization that receives the investment) can
lead to disastrous results.
An example is when top management exercises a myopic or short-term
perspective over the company's financial performance rather than
focusing on the long-term financial health of the company. They tend to
forego plans that will have long-term beneficial effects because their
compensation and bonuses are very much tied to short-term gains. This is
exactly what happened during the housing bubble in the United States.
Because compensation and bonus schemes do not purposely underscore the
goal of long-term financial success, top management of investment banks
like Goldman Sachs sometimes secretly bet against the very products they
sold to their investors. In addition, banks made risky investments out
of their depositors' money. These precarious behaviors are the cause of
the degradation of equity wealth not only among Americans, but citizens
of other countries as well.
These events are consequences of "information asymmetry" in the market.
As everyone knows, information is costly to acquire, hence, some people
know more than others. Moreover, having the necessary information can
mean power on the part of the holder. Thus, not all types of information
will be readily available for the consumer's consumption. With very
little information, Filipinos should be creative in finding means to
avoid the adverse effects of information asymmetry.
In this regard, the government can step in not only in educating people
on ways to assess possible investments, (and, hence, not be ensnared by
unworthy companies) but also in minimizing adverse behaviors of company
officers.
Recently, the Securities and Exchange Commission announced an overhaul
of disclosure rules with respect to executive and director compensation
schemes. They are considering requiring companies to disclose more
detailed information about compensation schemes available to company top
officials. This is a laudable move on the part of the government to
protect the interest of investors. These revised rules will definitely
improve transparency with respect to compensation, hence, giving
potential investors the opportunity to assess the probability of company
officials engaging in risky activities.
Indeed, it is good news that more and more Filipinos are now minding
their finances. With many Filipinos just starting out, two extremes
highlight what could possibly happen. They might end up parking their
money in riskless investments and, thus, miss out on value. Or, they
might find themselves trapped in very risky investments and, thus, lose
their money. The experience of advanced economies should serve as a
lesson. If the more sophisticated citizens of developed countries made
huge mistakes, Filipinos should all the more be cautious.
The Institute for Development and Econometric Analysis (IDEA), Inc. is a
non-stock, non-partisan institution dedicated to high-quality economic
research, instruction, and communication. The views and opinions
expressed herein are those of the author and do not necessarily reflect
those of the organization. For questions and inquiries, please contact
Remrick Patagan via ideainc.mail@gmail.com or telefax no. 920-6872.
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CARLOS ANI - International Microfinance Consultant - SEEDFINANCE Corporation Chairman
Mailing address: PO Box 90 UPLB Los Banos Laguna, Philippines 4031
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