CHAPTER II

Review of Related Literature and Studies

The scholarly publications listed below were taken from literature and studies
on the behavioural economics and financial literacy of the 4P's families undertaken by
eminent researchers and authors. To support the findings of the current study,
references to and reviews of these individuals' intellectual contributions to the field of
finance were made. The literature review set out to address the question of whether the
4P's contributed to improving the behavioural economics and financial literacy of its
beneficiaries and also looked at how well-versed Filipinos are in the ideas of
behavioural economics and financial literacy.

Related Literature: The Concepts of Behavioral Economics and Financial Literacy

The study of psychology as it relates to the economic decision-making processes

of individuals and institutions is what referred to as behavioral economics. It draws and
explores why people often make irrational decisions resulting to skidding any economic
model predictions (Kenton, 2020). Behavioral economics seeks to explain why an
individual decided to for options and how certain factors contributes to these choices
(Walters, 2020). The behavior in choosing between X and Y habitually relates to
rational choice theory. It is a theory on how an individual use rational calculations to
make rational choices and achieve outcomes that are aligned with one’s personal
objectives (Ganti & Anderson, 2022). Rational choice theory is often associated with
maximizing a person’s self-interest considering the risks, costs and benefits to provide
outcomes with the greatest satisfaction given the limited options available (Ganti &
Anderson, 2022). In relation to this, as costs is considered to achieve an individual’s
greatest satisfaction, this paper can safely say that financial literacy is one vital tool to
aid on weighing the options that revolves around costs and other values.

Financial literacy is having the capabilities (knowledge turned into skills) and
confidence (ability to decide amidst pressure) to make a rational decision. It has a major
impact on individuals as it tries to balance the overall concept of spending and saving
money, which covers; budgeting, investing, borrowing, taxation, and personal financial
management, which one may encounter on a daily basis (Zucchi, 2022). An individual
having the stated basic foundation of financial literacy tends to weigh available options
logically not only to gratify one’s immediate interest but also considering long-term
satisfaction. This concept effectively results to an individual developing a sense of
financial responsibility.

In the present, the modern economy increasingly requires consumers to make

various complex and sometimes bewildering financial choices (Mitchell & Lusardi,
2017). As behavioral economic identify the reasons behind the behavior towards
choices, financial literacy or illiteracy can help reason why a person act as such.
Financial literacy can both be beneficial to an individual and to the economy when
practiced, but the absence of it can be expensive and even ruinous.

The Effects of Behavioral Economics and Financial Literacy to Common Filipinos

Financial literacy and economic development go hand in hand, especially for

emerging countries such as The Philippines. Regardless of the world's tremendous
growth of financial advancement, the financial literacy of the average Filipino remains
alarmingly low. Such problems emerge from poor childhood education, which persists
until the adult years (Lucas, 2018). Increasingly, individuals are in charge of their own
financial security and are confronted with ever more complex financial instruments.
However, there is evidence that many individuals are not well-equipped to make sound
saving decisions (Altman, 2016).

A survey by Bangko Sentral showed only 25% of Filipinos were able to correctly
respond to questions about financial literacy while 75% of the Filipinos below the
poverty line demonstrated a lack of specific knowledge that relates to financial literacy,
which usually results to ineffective spending and financial planning, expensive
borrowing, and poor debt management (Lusardi, 2019). This indicates that 75 million
Filipinos have no concrete grasp about the ideas of inflation, risk diversification,
insurance, compound interest, or even the idea of having a savings account in a bank.

Being financially literate allows an individual to be better prepared for specific

financial roadblocks, which, in turn, improve the standard of living through an increase
in financial stability, decreases the chances of personal economic distress while
financial illiteracy mostly demonstrates a lack of skill required to make informed
financial decisions. Due to the Filipinos and the governments’ attitude towards the
financial concept, the Philippines' financial literacy rating has been dubbed the lowest of
the low. This implies that being financially literate is a luxury to Filipinos given their
average financial situation.

Proposed Programs and it’s Goals for the Poor Filipinos

The low financial literacy rate in developing countries such as The

Philippines means cycles of poverty continue, often intergenerationally (Olos, 2016). In
the year 2015, 22 million Filipinos were living in extreme poverty and remained destitute
until this year. The uneducated populace, who frequently live-in big families, are most
affected by poverty's vicious cycle (O’Brien, 2019). The Philippine government is
actively attempting to accelerate its strategy to reduce poverty. Its long-term objective
is to be able to offer more economic opportunities, which would then allow many
residents earn higher and more consistent wages. The growth of non-agricultural jobs,
government transfers, and recruiting qualified Filipinos to assist through the Pantawid
Pamilyang Pilipino Program (4P’s) are some of the factors that contributed to the
reduction in poverty. This particular programme has resulted to a 25% reduction in
poverty.

The Pantawid Pamilyang Pilipino Program (4P's) is a government programme

under the Department of Social Welfare and Development (DSWD) that started in the
year 2007. It aims to break the series of poverty by providing a conditional cash grant to
the poorest of the poor Filipinos (World Bank, 2017). Because the initiative strives to
disrupt intergenerational sequences of poverty by providing the inadequate resources
and services required for growth and development, children are less likely to remain
poor into adulthood (Guo, 2022). 4P's operates in all 17 regions of the Philippines.
Beneficiaries are selected through the National Household Targeting System for Poverty
Reduction (NHTS-PR), which identifies who and where the poor are in the country.
Since the Pantawid Pamilyang Pilipino Program's (4Ps) implementation, both its
beneficiaries' lives and the nation's poverty condition have improved. Among these
improvements are the empowerment to take charge of one's life, an improvement in
health, an increase in school attendance, the development of the beneficiaries'
entrepreneurial management skills, and an improvement in financial literacy (Abalos,
2016). However, a number of 4P’s recipients face challenges while receiving benefits
from the aforementioned programme, including inclusion and exclusion errors,
interference from local officials, spending allowance on alcohol and gambling, pawned
ATM cards, delays in scheduled releases, and the program's perceived tendency to
reward laziness in beneficiaries.

The Pantawid Pamilyang Pilipino Program (4P's) is on course to the realization

of its goals. The impact evaluations display hopeful results in terms of education and
health outcomes for children. The program's demand-side support to poor Filipino
families is critical to achieving the desired outcomes in poverty reduction, health, and
education. Potential private and social returns to investing in the 4P's remain
important. Moreover, risks can be lessened. The Pantawid Pamilyang Pilipino Program
(4Ps) significantly aided recipients in achieving the program's fundamental goals in the
near term, despite the fact that it is still in operation (Villaruz, 2016). The challenge,
however, lies in what will happen to the beneficiaries after the programme ends. At this
point, one has yet to see how far the current 4P's have achieved their aim of alleviating
intergenerational poverty. The return of investment in the areas of health and education
has yet to be translated into human and social capital, and this cannot be accomplished
overnight (De Vera, 2016).

Though the enforcement of the Pantawid Pamilyang Pilipino Program (4P’s) has
successfully alleviated its beneficiaries’ financial matters and reduced the nation's
poverty cycle, it has been reviewed in the several academic works cited in this section
that the aforementioned programme never contributed to helping enhance the financial
literacy and behavioural economics of its recipients. Therefore, this paper can safely
conclude that the goals of the Pantawid Pammilyang Pilipino Program (4P's) were
never attuned to improving the financial literacy and behavioural economics of the
Filipinos but on the matter of demoting poverty in the country, and that scarcity can
never be linked to the behavioural economic and financial literacy of an individual.

Related Studies: Decision Making vs. Financial Literacy

According to a study conducted it was asserted that decision-making should

begin with the identification of the decision maker(s) and stakeholder(s) in the
decision, thereby minimizing any potential disagreements regarding the problem
definition, requirements, goals, and criteria (Baker et. Al, 2001). Decision-making is
influenced by a number of factors. People's decisions are affected by a variety of factors,
such as prior experience, cognitive biases, age and individual differences, the perception
of personal relevance, and an increase in commitment. For one to understand the
decisions that are made, one must first understand the factors that affect the decision-
making process. In other words, the variables that affect the process could have an
effect on the results (Acevedo, & Krueger, 2004).

So, when it comes to enhancing the financial well-being of their inhabitants, both
developed and emerging economies place a high priority on financial literacy. Financial
literacy is regarded as a way to hasten financial well-being, so having it would assist
households with their day-to-day financial responsibilities, help them deal with
financial emergencies, and even help them escape the grip of poverty (Alwee Pg Md
Salleh, 2015). While behavioural economics offers new perspectives on how to
maximize the effects of financial education, it also draws attention to other
psychological and cognitive factors that may ultimately serve as binding constraints to
change, which serves as a reminder that financial education itself must be realistic.
When used properly, behaviorally-motivated goods and regulations can help make up
for financial education's shortcomings (OECD, 2013).

The ability to comprehend economic information and make informed decisions on

debt repayment, pension planning, and asset growth is referred to as financial literacy
(Lusardi and Mitchell, 2013). It is the ability to use knowledge and skills to manage
financial resources in a way that ensures long-term financial stability (Hung et al. 2009).
People who have a high level of financial literacy can use that information to make
informed decisions. Financially literate people or persons are capable of managing their
money effectively enough just to create and attain future objectives, regardless of what
those goals may be.

In addition, financial knowledge is one’s understanding of financial matters.

Several studies have used “financial knowledge” and “financial literacy”
interchangeably. Different authors have conceptualized financial literacy as comprising
financial awareness, abilities, and attitudes affecting people’s financial behavior Lusardi
and Mitchell (2011). People with financial literacy can better manage their finances,
save for emergencies, plan for their children’s education, and plan for their post-
retirement years. Its continuing importance and people’s failure to fulfil even minimal
criteria have pushed it to policy discussions (Sevcík, 2015). Financial literacy, as defined
by Mitchell and Lusardi (2011) is “knowledge of basic financial concepts and the ability
to perform simple computations.”

Similar to this, financial literacy is the knowledge of and use of personal finance,
according to Huston (2010). Researchers connect other ideas, such financial capability,
knowledge, and awareness, to financial literacy. Atkinson and Messy state that basic
financial principles are useless without being applied to one's financial actions (2012).
Financial capability and literacy are interchangeable words, according to Kempson et al.
People can be deemed financially literate if they possess the information,
comprehension, and management skills necessary, but they cannot be deemed
financially capable until their actions are consistent with this. Financial literacy is a
broad concept, and research has focused on studying financial literacy outcomes,
determining levels among different population cohorts, identifying factors that affect
financial literacy, and examining the effects of financial education on enhancing
financial literacy.

In recent years, behavioral economics has become more popular. This occurred
as a result of the inadequacy of current consumer decision-making models to
adequately account for human behavior (Bernheim and Rangel, 2007). Behavioural
economics is an experimental science since it is based on research that combines
economic deduction with psychological induction to offer a complementary technique
of understanding human decision-making (Brzezicka and Wisniewski, 2013).
Behavioral economics, is a science of behavior, albeit highly organized human behavior.
The value of economic concepts for behavioral psychology rests on their empirical
validity when tested in the laboratory with individual subjects and their uniqueness
when compared to established behavioral concepts (Hursh, 1984).

Financial literacy is also a collection of abilities, attitudes, and information that

citizens need to maintain their financial security in today's society. They are active
participants in the financial products and services sector. Financially literate people are
knowledgeable about matters of money and pricing, are capable of managing their
personal or family budget responsibly, and can handle their financial assets and
responsibilities in light of shifting life circumstances (Dvorakova, 2009). Concerns
about consumers' lack of ability to make sophisticated financial decisions have been
raised by research in the fields of behavioral economics and financial literacy. Much of
the literature in behavioral economics argues that consumers rely on heuristics that
lead them to consistently make bad decisions. According to research on financial
literacy, many people lack a fundamental comprehension of these concepts, which may
make it more difficult for them to handle their money wisely (Elliehausen, 2018).

Having the ability to make wise financial decisions is the main advantage of financial
literacy. It gives us the information and abilities we need to effectively manage our
finances including budgeting, saving, borrowing, and investing (Rose, 2021). Better
financial judgments are accompanied by a high level of financial literacy. Financial
planning and investing are less likely to be practiced by those who lack financial literacy
( khawar and Sawar, 2021). A person will manage money more wisely and flourish
financially if they have strong financial literacy (Journal of Education and Practice,
2015).

The Application of Financial Literacy

In the 1970s, an economist named Gary Becker first used the phrase behavioral
economics to describe rational choice theory—the idea that people always respond
rationally and maximize self-benefits—and explain how people make decisions and
respond to market forces (“An Introduction to Behavioral Economics”, 2020). Over
time, other scholars began to delve deeper into the field. Considered the “Father of
Behavioral Economics,” Richard Thaler challenged the belief that people are rational
human beings with stable preferences who always maximize profits and minimize
losses. He revealed that there are “anomalies” in human behavior that cannot be
described through standard economic theory and that people are influenced by their
environment, past experiences, and emotional and mental states (Gino, 2017).

After these discoveries, the idea of behavioral economics began to spread and
increase in popularity. Because this field focuses on utilizing psychological insights to
determine human behavior, economists have been studying how to not only understand
but also manipulate and influence behavior through those psychological concepts, as
opposed to policy and marketing changes. By using these psychological nudges, both
government agencies and private markets can lower their costs and still achieve the
expected economic results. For example, a common concept in behavioral economics is
loss aversion, the idea that losses are more painful and impactful than gains. This partly
explains why a seller will often demand a higher price for a good than a buyer is willing
to pay for it. Taking this concept into consideration, advertisers often convince
consumers to purchase their product by framing it in terms of a loss, stating that
consumers will be worse off if they do not buy the product (Gal, 2018). A study
completed in 2018 showed that households who were offered this “nudge” increased
their electricity consumption by 2% more than households not exposed to the nudge of
loss aversion (Abrahamse & Shwom, 2018).

Efforts to measure financial literacy date back to at least the early 1990s when the
Consumer Federation of America (1990; 1991; 1993; 1998) began conducting a series
of “Consumer Knowledge” surveys among different populations which included
questions on several personal finance topics: consumer credit, bank accounts,
insurance, and major consumer expenditures areas such as housing, food and
automobiles. The 1997 “Jump$tart” survey of high school students referenced above has
been repeated biennially since 2000 and was expanded to include college students in
2008 (see Mandell 2009, for an analysis these surveys). Hilgert et al. (2003) analyze a
set of “Financial IQ” questions included in the University of Michigan's monthly Surveys
of Consumers in November and December 2001.

The Filipino mindset upon receipt of salaries, as commonly-known, is that upon

receipt of salaries, spending comes in before saving. What is left, is saved. If there’s none
left, then, there’s nothing saved. According to a study conducted by Philam Life, 96
percent of Filipinos are concerned about their own and their family’s health, however,
only 16 percent of them are prepared to pay for medical costs in case they are
diagnosed with a critical illness. There is a rising number of senior-dependents or those
retirees who depend on their children for financial help, due to lack of financial
education. Financial planning teaches individuals to be responsible when it comes to
their finances, and instills the discipline needed in order to keep track of their financial
goals.

Financial planning involves educating Filipinos on the different types of goals

that they should set: short-term, medium-term, and long-term. Short-term goals involve
monthly living expenses that need to be paid, or the person’s basic needs, including the
setting-up of an emergency fund. In contrast, medium term goals are those you want to
achieve in one to five years like buying a house or a car, while long term goals are those
that take longer than five years to achieve. To address the growing demand for more
investments in the country, the financial industry advises that Filipinos should save first
and spend whatever is left after putting their savings aside (Talavera, 2017).

Everyday choices that consumers make affect their finances, food, and health.
According to behavioral economics studies, people frequently choose the immediate,
albeit lower benefit, as they are frequently motivated by short-term satisfaction.
Delaying gratification, or choosing the delayed reward, can, nonetheless, be
advantageous (Zandstra, n.d)

Data on household financial behavior decisions and understanding of financial

concepts are presented for the first time in a recent survey on financial aptitude and
inclusion that was carried out by the World Bank in partnership with the Bangko
Sentral ng Pilipinas (BSP). According to the study results, 55% of Filipino respondents
say they don't have enough money to buy food or other basics, and 26% say this
happens frequently. This issue affects around 23 million persons who make financial
decisions, according to estimates drawn from the survey data. Most people say that not
having enough money to cover basic needs is primarily due to a lack of income. A lack of
income is cited as the cause by 62% of households making less than 10,000 Pesos
($217) per month.

However, there are other factors at play as well. Giving money to others,
overspending, unplanned expenses brought on by illness or other situations, and a lack
of planning and budgeting are a few other contributing factors. Failure to plan and
budget is the option that is least likely to be chosen, according to 21% of respondents.
Only 60% of respondents claimed to budget or plan their spending. However, study of
survey data reveals that those who organize their finances are more likely to have
money left over after covering the necessities and are less likely to admit to taking out
loans that are beyond their means. Filipinos who budget have more control over their
finances regardless of their income, region, employment, or age. (Mylenko, 2015)

Benjamin Diokno, governor of the Bangko Sentral ng Pilipinas (BSP), emphasized

the significance of raising financial literacy among Filipinos, especially at a time when
digital transactions are on the increase, stressing not just the advantages for individuals
but also for the country's economy. To increase financial resilience, Diokno stated that
the central bank and its private-sector partners aim to add digital skill-building to
existing traditional financial literacy programs. He stated in his statement at the recent
virtual 4th Financial Education Stakeholders Expo that a financially stable person may
be more productive and make a more significant contribution to the development of the
country. He continued by saying that because of the pandemic, more Filipinos are now
saving, buying health and life insurance, and making retirement plans. According to
Diokno, who cited data from various sources, contributions to the Personal Equity and
Retirement Account (PERA) increased from 1,388 in 2019 to 2,671 in 2020. In addition,
the number of life insurance accounts in 2019 was 39.1 million, up from 43.5 million the
year before. Non-life insurance coverage increased from 9.8 million in 2019 to 30.3
million in 2020. Prior to the pandemic, roughly 48% of Filipinos who participated in the
central bank’s financial inclusion survey indicated they had savings, but that number
rose to 53% in 2019. Around 18% of respondents stated they save in banks, up from
18% in 2018 to 21% in 2019.

Diokno claims that a 2015 World Bank (WB) assessment on adult financial
literacy found that 25% of Filipinos in the area have the lowest levels of financial
literacy, compared to 59% in Singapore, 52% in Myanmar, and 36% in Malaysia, among
others. He said that only three of the seven financial literacy questions were correctly
answered by Filipino respondents, and that simple division, inflation, and interest
computation all performed poorly. These conclusions are reinforced by parallel central
bank surveys that demonstrate that five out of ten people keep their money at home and
five out of ten borrow money from unauthorized lenders. He also said that “one in every
100 Filipinos has been victimised by investment scammers, amounting to a total loss of
over PHP25 billion.” “These experiences tell us that there is still a long way to go. Many
Filipinos continue to put off saving, misuse credit, ignore good investment
opportunities, or become victims of investment fraud, the official said. As a result, the
government and the business sector have improved their cooperation to raise financial
literacy and education levels among adults and schoolchildren in the Philippines.

According to OpenGov Asia, the Philippines and Singapore have expanded their
fintech partnership through a variety of cross-border collaborations, improving ASEAN
regional payments and enabling financial inclusion for overseas Filipino workers
(OFWs) and micro-small-to-medium-sized firms (MSMEs). At the recent World Fintech
Festival Philippines (WFF) 2021 - Singapore Fintech Festival, Governor Benjamin
Diokno of the Bangko Sentral ng Pilipinas (BSP) and Managing Director Ravi Menon of
the Monetary Authority of Singapore (MAS) signed the expanded Fintech Innovation
Function Cooperation Agreement (SFF). One of the highlights was the union of the QR
and real-time payment systems of the two nations. According to the BSP, the initial step
toward integrating the Philippine payment system with those of our ASEAN neighbors,
starting with Singapore, is now being taken. Amor Maclang, convenor of Digital
Pilipinas, emphasized the importance of a whole-of-society approach in meeting the
technological demands of now and tomorrow in order to show his support for the
expanded BSP-MAS Cooperation Agreement (Hani, 2021).

In a relevant study, financial literacy and economic development go hand in

hand. This is especially true for emerging countries such as the Philippines. Financial
literacy is integral to ensuring the sustainability of an economy in the future. With
various market forces affecting global and regional economies, we must prepare
ourselves and become knowledgeable on financial issues and information that can
empower us and enable us to make the right financial decisions and protect our
investments. Unfortunately, financial literacy in the Philippines is an almost foreign
concept to the majority of our nation’s citizens, with only 25% of the Filipino population
being able to answer financial literacy questions through surveys. This is generally
alarming since financial literacy plays an integral part in ensuring the sustainability of
the Philippine economy. Without financial literacy, one cannot make important
decisions regarding investment, savings, borrowing and, most certainly, about
insurance. Indeed, it has been found, for example, that lack of understanding of interest
rates has placed creditors at risk.

Numerous studies and surveys that tackle financial literacy in the Filipino
population yielded almost the same results, with the majority of Filipinos having no
concrete grasp on financial management. One of these surveys was conducted S&P, an
international credit rating agency that produces financial research. S&P conducted its
2014 S&P Rating Services Global Financial Literacy Survey, touted to be the “most
extensive measurement of global financial literacy to date,” and discovered that the
Philippines ranked in the bottom 30 of 144 countries surveyed. Only 25 percent of adult
Filipinos are literate on the basics of finance.

The survey was conducted by interviewing 150,000 adults throughout 144

countries on four basic financial concepts: numeracy (interest), risk diversification,
inflation and compound interest. The study was conducted with the participation of the
Gallup World Poll, the World Bank and the Global Financial Literacy Excellence Center
(GFLEC) based at George Washington University.

Among the surprising findings is that two-thirds of adults worldwide are

financially illiterate. And that only one-third of adults worldwide are financially literate.
This means that around 3.5 billion adults worldwide are financially illiterate. It also
noted that those most likely to be financially illiterate are women, the poor and the less
educated. Men were found to be more literate (35 percent) than women (30 percent).

Interestingly, the study found that those availing themselves of financial services,
such as those of banks and credit card companies, would most likely have higher
financial literacy, regardless of wealth or educational attainment. Nonetheless, the study
concluded that generally, the rich have better financial skills than the poor. Interestingly
also, financial literacy increases as income increases and educational attainment goes
higher. Another astonishing finding is that financial literacy improves from general
proficiency in mathematics. This is also evident in the prevalence of formal savings in
Filipino households. According to the statistics, only a dismal 40% of adult Filipinos
save. Of those who save, 68% keep their saved money at home, 33% keep their money
in formal financial institutions, 7.5% save through cooperatives, and 2.6% keep their
money in group savings, or “paluwagan”.

Among the surprising findings is that two-thirds of adults worldwide are

financially illiterate. And that only one-third of adults worldwide are financially literate.
This means that around 3.5 billion adults worldwide are financially illiterate. It also
noted that those most likely to be financially illiterate are women, the poor and the less
educated. Men were found to be more literate (35 percent) than women (30 percent).

Interestingly, the study found that those availing themselves of financial services,
such as those of banks and credit card companies, would most likely have higher
financial literacy, regardless of wealth or educational attainment. Nonetheless, the study
concluded that generally, the rich have better financial skills than the poor. Interestingly
also, financial literacy increases as income increases and educational attainment goes
higher. Another astonishing finding is that financial literacy improves from general
proficiency in mathematics.

However, the blame should not be put entirely on the population since access to
banks and formal financial institutions are scarce in some areas in the Philippines. As of
2014, per Bangko Sentral ng Pilipinas (BSP) data, 595 municipalities in the country
have no banks. This is out of a total of 1,490 municipalities in the country. This is
notwithstanding the fact that domestic banking offices increased from 7,585 in 2001 to
10,315 by the end of December 2014. A significant increase can also be observed in the
distribution of automated teller machines, which grew from 3,882 in 2001 to 15,562 by
the end of December 2014. So, while financial knowledge may be easily disseminated
throughout the Filipino population, a significant percentage of the population will still
be unable to effectively use the best practices in financial literacy in the Philippines.
This goes to show that financial literacy needs to co-exist with better banking
accessibility for it to be practiced in full.

Conclusion

The challenge of financial literacy is currently being addressed on a global scale,

and the trend indicates that raising the level of population awareness in this field can be
quite beneficial. Financial stability and active participation in the market for financial
goods and services both require a certain level of knowledge and abilities known as
financial literacy. Citizens who have a strong grasp of financial concepts can responsibly
manage their own budgets and are knowledgeable about matters of money and prices.
Finances play a significant role in daily life, and financial literacy is the best defense
against citizen over-indebtedness (Tomášková et al., 2011)

The basis of many of the world's most difficult issues, such as persistent poverty,
is matter of choice. These social issues can be solved at a wide scale using effective
techniques provided by behavioral economics, and more specifically the newly
emerging field of behavioral design. To create low-cost interventions with significant
impacts, behavioral design applies knowledge from decades of academic research in
behavioral economics and behavioral psychology. To assist control their spending and
handle unexpected income fluctuations, the poor have historically adopted a range of
informal savings strategies. Even though they might be able to provide more protection
and flexibility than some of these informal methods, official financial institutions have
struggled to access the funds of the poor. Furthermore, individuals may have less access
to the "usefully large" lump payment, which is frequently required to make long-term
investments or handle emergencies, if they don't save enough or take their funds from
formal institutions too frequently or too early (Rutherford, 2000).

Numerous initiatives, regulations, and products created to encourage formal

savings among low-income households have had only little, widespread success. Despite
a well-established banking system with strict consumer protection regulations, just
26% of adults in the Philippines use formal financial services, and nearly 80% do not
have a deposit savings account (Honohan, 2008; Philippines, 2009). There may be
serious repercussions. Nearly 40% of households say they don't have enough cash on
hand to cover emergencies and unforeseen costs (Philippines, 2009).

Therefore, researchers advised the development of the topic of financial literacy

as a result. Since it is expected that the student has acquired the fundamental economic
and mathematical skills, the subject should be taught in the second or third year of
studies because it can be easily built upon this experience. Financial literacy, pricing
literacy, budget literacy, and legal literacy are four major divisions that should be
included in the subject itself. The section on financial literacy should include the
following themes in particular: finances, financial goods, the financial market, and the
distinction between a job and a business. The component of budget literacy should
cover assets, liabilities, balance, income statement, management of personal budget,
financial planning, balanced/deficit/surplus budget, and establishment of reserves. The
portion of price literacy should cover price practices, taxes, and inflation. Contracts,
loans, and laws should all be covered under the legal literacy section. In order for the
process of financial education to be successful, it is essential to make sure that all
educational activities together cover every aspect of the financial market.

THEORETICAL/CONCEPTUAL FRAMEWORK OF THE STUDY

Individuals are faced with making a lot of decisions every day. While some are
significant, some are not. Some are challenging to create, while others are simple. Some
decisions may require extensive research, whereas others may require only intuition or
gut feeling. Sometimes choices prove to be incorrect, either from the perspective of the
person making the decision or from that of society. For better understanding, the
researchers provide a theoretical model to derive the fundamental mechanisms that
influence human decision-making and reactions to behavioral interventions like nudges.

The model offers a theoretical foundation for the individual decision-making

process that is adaptable to a variety of choice situations. Based on this organized
decision-making process, the researchers also pinpoint the mechanisms that underlie
the effectiveness of behavioral treatments, particularly nudges. Therefore, the model
can be used to forecast when and in which decision-making scenarios a nudge is likely
to be beneficial.

Think about a person who must choose between two options: x and y. According
to conventional utility theory, people make decisions that lead to the desired outcome
with knowledge. Nevertheless, there are many instances that show humans are not
always rational and occasionally make decisions based on heuristics, which leaves the
individual open to making mistakes.

A two-step decision decision-making paradigm is what we recommend. The

initial decision is whether to choose attentively utilizing System 2 or carelessly using
System 1 (Kahneman, 2003). System 1 and 2, which stand for intuition and logic,
respectively, are considered to be two cognitive systems that direct an individual’s
decision-making. Applying this to our model, we consider people to make decisions in
two steps. The individual decides in the first phase whether System 1 or System 2
should be the deciding factor when making the actual decision in the second step. If
System 1 makes the final decision, this is referred as an inattentive choice that was
made using heuristics. If System 2 is dominant, we refer to this as an attentive choice, in
which the person makes a totally reasonable decision. Although it needs some mental
effort, diligent optimization will almost always produce the desired result.

The alternative is to make a quick, careless decision based on heuristic, which

could result in a mistake. Due to optimization’s cognitive demands and the fact that
decisions are frequently subject to some degree of ambiguity, it is one of the main
reasons why most people have limited attention and are not totally rational. So it often
 takes mental effort to make a well-informed, utility-maximizing decision. Individuals
may instead rely on some heuristics to lessen or eliminate this effort, such as making
selections based on intuition or habit, selecting the first or last item on a list, selecting a
preselected alternative, acting on cues like reminders, or even conducting a random
draw.

Using such heuristics instead of making a rational attentive choice may lead to a
mistake. Hence, there is a trade-off between the cost of making an attentive choice and
the consequences of a potential mistake from making an inattentive one. In the first
step, the individual decides whether it pays off the exert the effort or not. In the second
step, the actual choice between x and y is made. If the choice is made attentively, the
outcome will be the preferred one after optimization, and the individual will not be
nudgeable. On the other hand, the inattentive choice is based on some heuristic, so then
the individual may be susceptible to nudges.

Decision

Attentively(costly) Inattentive

x y x y

Preffered outcome prob. =1 Preffered outcome prob. <1

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