Received: 8 January 2016 Revised: 30 December 2016 Accepted: 8 February 2017

DOI 10.1002/cb.1644

ACADEMIC PAPER

Psychological biases of individual investors and financial

satisfaction
Shalini Kalra Sahi

Assistant Professor ‐ Finance, Management

Development Institute, Sukhrali, Mehrauli
Road, Gurgaon ‐122001, Haryana, India.
Correspondence
Shalini Kalra Sahi, Assistant Professor ‐
Finance, Management Development Institute,
Sukhrali, Mehrauli Road, Gurgaon‐122001,
Haryana, India.
Email: skalrasahi@mdi.ac.in;
skalrasahi@gmail.com
Abstract
Traditional finance theory is based on the principle of maximization of utility and explains how
choices are made by rational people. Although the theory provides numerous insights, observa-
tion of actual behavior of people was seen to be different from what the theory predicted. The
homo economicus is in reality a homo sapien who has emotions and beliefs that help to filter
the content from his or her environment. These beliefs and preferences that arise due to cogni-
tive limitations, presence of emotions, and various psychological motives guide or bias his or her
decisions. Much literature states that the biases should be corrected as they negatively impact
financial behaviour and individual's well‐being. However, evolutionary psychology considers
biases as design features of human mind. Thus, biases are not always bad, as at times, these biases
can help the individual investor to choose the best course of action from the multiple possibilities
and enable committing the less costly mistakes, thereby helping the individual to achieve
satisficing behaviour. This paper aims to explore the investor biases and see whether they are
related to the financial satisfaction of the individuals. Financial satisfaction is the measure of
satisfaction with one's financial situation. The results showed that overconfidence bias, reliance
on expert bias, and self‐control bias have a positive and significant association with financial
satisfaction levels. Association of a few other biases with financial satisfaction was also observed
under certain control conditions. This study provides further insights on investor behavior and
paves the way for various possibilities for future research.

KEY W ORDS

behavioural finance, factor analysis, financial satisfaction, individual investor biases

1 | I N T RO D U CT I O N financial investment behavior and how these behaviours relate to the

Competition in the financial markets has increased over the years.
There are more players in the market today than there were a decade
ago. The current investment environment has given the financial con-
sumer a plethora of investment opportunities to divert his or her saving
towards. However, the investor is not well equipped to evaluate all the
available opportunities, in order to maximize his or her financial well‐
being. Hence, the individual has to resort to certain judgment processes
and is influenced by emotions and psychological motives that help the
individual to make an investment choice. Thus, the investment decision
process is influenced by a number of factors that lead to bounded ratio-
nal behavior (Simon, 1993), where the investor aims to satisfice his or
her needs and in this endeavour, makes use of various heuristics, and
exhibits behavioural biases. Therefore, to understand the financial con-
sumer better, it would be essential to gather deeper insights into their
financial satisfaction of the consumer.
The ability of an individual to effectively manage his or her social
and material needs would require the effective management of their
monetary resources. Previous studies on individual's investment deci-
sions and satisfaction with their financial situation have focused mainly
on the socioeconomic and demographic variables. Little attention has
been given to the psychographic variables such as individual investor
biases. These biases pertain to the beliefs and preferences that an indi-
vidual has and though these have been found to be highly operational
in the financial investment decisions; however, their relationship with
financial satisfaction has not been studied in detail.
Hence, by taking a descriptive view of the how investors make
their investment decisions, the patterns of behaviour of the individual
investors and their association with financial satisfaction have been
explored in the study.

J Consumer Behav. 2017;1–25. wileyonlinelibrary.com/journal/cb Copyright © 2017 John Wiley & Sons, Ltd. 1
2 SAHI
The research findings suggest that individual investor biases may
have a significant role in determining individual decision maker's
financial satisfaction. Among the biases, self‐control bias, overconfi-
dence bias, and budgeting tendency were significantly associated with
financial satisfaction across the sample, while reliance on expert bias,
categorisation tendency, and socially responsible investing bias were
found to be significantly associated with financial satisfaction under
certain control conditions.
The paper is organized as follows: In Sections 2 and 3, review of
the literature on psychological biases and financial satisfaction is
presented. Section 4 gives the rational of the study, and Section 5
details the hypothesis. Section 6 presents the research design and
methodology, and Section 7 discusses the development of the individ-
ual investor bias constructs. Section 8 sheds light on the data analysis
techniques, and Section 9 presents the results of the study. Section 10
discusses the results of the hypothesis testing, and Section 11
concludes the study and gives future research directions.
2 R E S E A R C H O N T H E P S Y C H O LO GI C A L
| These biases cloud the judgment and lead the investors to take
BIASES IN FINANCIAL DECISION MAKING
When the theories of traditional finance were tested in actual context,
various anomalies were observed. These anomalies were the result of
departures from the norms laid down by standard finance theories.
Further analysis of the anomalies led to the understanding that actual
behavior observed is not as modeled by the standard theories. Thus,
behavioural finance arose to address certain limitations of traditional
finance theory so as to include economic psychology and relax
assumptions of unbounded rationality, maximization of utility, com-
plete availability of information, and ability to evaluate the complete
set of information. According to Ackert (2014), “although the tradi-
tional approach provides many useful insights, something seemingly
is missing. For example, people consistently suffer from particular
behavioural biases and the reigning traditional models do not provide
satisfactory explanations.” (p. 31). There is substantial behavioral
finance literature available, documenting that people make systematic
errors in the way that they think: They are overconfident, they put too
much weight on recent experience, and so forth, and their preferences
may also create distortions (Ariely, 2008; Fairchild, 2005; Fairchild,
2012; Kahneman & Tversky, 1979; Ritter, 2003; Thaler, 2005; Tversky
& Kahneman, 1974). Stanyer (2008) stated that “advances in behav-
ioural finance also provide a framework that enables us to better
explore and understand investor preferences, and to delve into the
biases that affect how we take decisions and how these may cause
us to deviate from the textbook assumptions of how rational investors
ought to behave.” (p. 11).
Cognitive biases can result from the reliance on heuristics that
help people to make judgments in face of uncertainty (Kahneman &
Tversky, 1979; Tversky & Kahneman, 1974). Apart from cognitive lim-
itations, biases have also been found to result from affective influences
and emotions (Haselton, Nettle, & Andrews, 2005; Lucey & Dowling,
2005; Seo & Barrett, 2007; Ariely, 2008; Taffler & Tuckett, 2010;
Bechara, 2011; Fairchild, 2012). Evolutionary psychology also enlists
psychological motives such as fear, greed, safety needs, security needs,
to also bias individual's choices (Haselton et al., 2005). Thus, in the face
of uncertainty, decision making becomes more subjective, reasoning
becomes less ideal, and the attempt to take an action on the basis of
the judgment and preferences of the individuals becomes more perti-
nent (Pompian, 2006). These beliefs and preferences that people hold
lead to decisions that are biased (Shefrin, 2002). A number of biases
have been documented in the behavioural finance literature and how
these impact investment behavior (Odean, 1999; Barber & Odean,
1999; Barber & Odean, 2001; Montier, 2002; Baker & Nofsinger,
2002; Ritter, 2003; Barberis & Thaler, 2003).
Thus, various studies in finance state that biases are systematic
errors in judgment (Kahneman & Riepe, 1998) and thus, violate the
principles of rational choice that prevents an individual to maximize
his or her utility. Further, it has been found that the individual investors
are prone to various biases that prevent them from making sound
investment decisions (Baker & Nofsinger, 2002; Barber & Odean,
2001; Kahneman & Riepe, 1998; Shefrin, 2002). “By allowing psycho-
logical bias and emotion to affect their investment decisions, investors
can do serious harm to their wealth” (Baker & Nofsinger, 2002; p. 98).
risks that he or she fails to acknowledge, experience outcomes that
were not anticipated, prone to unjustified trading and many a times
end up blaming themselves or others if the outcomes turn out to be
bad (Kahneman & Riepe, 1998). Hence, according to the vast number
of research studies, it becomes therefore important to identify the
biases that the investor is prone to so as to enable them to deliberate
on these and correct them as far as possible to help in better invest-
ment decisions. Hence, biased behaviour has been considered as a
flaw, which needs to be corrected (Shefrin, 2000; Pompian, 2006).
However, insights from evolutionary psychology provide a differ-
ent perspective on the cognitive and emotional biases and consider
them to be an essential part of “being human.” According to Haselton
et al. (2009), “The human mind is an intricate, evolved machine that has
allowed humans to inhabit and exploit an incredible range of environ-
ments.” (p. 733). They further state that “We are a remarkably intelli-
gent species, capable of surviving and reproducing in a complicated
and ever‐changing world.” (p. 733). How can the mind then be so
flawed as the behavioural finance literature suggests?
This is where the aspect of reference criteria comes in. When the
concept of Homeo economicus is the reference point, wherein human
beings are rational agents as per the standard finance and economics
assumptions, any behaviour that is deviating from this rationality is
considered as a flaw or a bias. However, if we were to look into the
evolutionary psychology, we would find that people are not rational
as the traditional theory shows and, are, by the designs of evolution,
susceptible to biases. As Johnson, Blumstein, Fowler, and Haselton
(2013) state, “judgment and decision making biases, can be expected
and appear to be primarily geared toward management of alternative
errors.” (p. 2). Error management theory put biases in broadly three
domains, namely, (a) protective effects in perception, attention, and
learning; (b) biases in interpersonal perception, and (c) self‐related
biases. The category of self‐related biases includes positive illusions,
illusion of control, and so forth (Haselton & Nettle, 2006).
Haselton et al. (2005) state that “where biases exists, individuals
draw inferences or adopt beliefs where the evidence for doing so in
SAHI
a logically sound manner is either insufficient or absent.” (p. 725). The
authors further elabourate that biases reveal the intricacy of the mind's
design and “because they depart from standards of logic and accuracy;
they appear to be design flaws instead of examples of good engineer-
ing.” (p.725). Biases reveal the design of the human mind and are not
design flaws.
Haselton et al. (2009) stated that biases could be heuristics, error
management effects, or experimental effects and throw light on the
ways humans have evolved to think. When it comes to complex
decision making, heuristics have been found to be more effective.
Further, the error management theory shows that people prefer to
make the less costly errors, over the more expensive ones, in the
endeavour to minimize the errors of decision making under circum-
stances of uncertainty (Haselton & Buss, 2000 ; Haselton & Nettle,
2006). Hence, biases are inherent in decision making and allow a
person to make sense of his or her environment that enables ensuring
well‐being of the individual (Cummins & Nistico, 2002; Haselton et al.,
2005; Johnson & Flower, 2009; Taylor & brown, 1988).
When it comes to financial investment decisions, it is pertinent
to note that a certain degree of uncertainty and risk is inherent in
each investment decision choice and given the fact that the future
holds a certain level of uncertainty associated with it, the investment
decision behaviour is expected to be biased (Slovic, 1972; Thaler,
1999). Further, Olsen (2007) stated that a “bias is not necessarily
bad as long as it leads to the results that the decision maker wishes.”
(p. 53). As Johnson, Blumstein, Fowler, and Haselton (2013) state,
“All psychological biases entail potential costs because they amount
to false beliefs about the world.” (p. 5). Individuals make use of
biases to minimize the costs of decision making under conditions
of uncertainty, and this though may not lead to a maximisation of
the utility for the individual, but it does lead to a certain level of
satisfaction.
However, very scant literature exists that explores the relationship
of the investor biases with financial satisfaction. Hence, this paper is
focused on understanding the behavioural undercurrents of financial
investment decisions with particular focus on the investor biases and
how it relates to the perceived financial satisfaction.
3 RESEARCH ON FINANCIAL
| et al., 1985).
SATISFACTION
A feeling of satisfaction with one's financial situation and position
would be defined as financial satisfaction. The role of money in the
ability of an individual to meet their financial objectives cannot be
undermined. Much has been stated on how people who are not able
to meet their financial objectives get into depression, have health
problems, and so forth. O'Neill, Sorhaindo, Xiao, and Garman (2005)
found various health problems that people face on account of financial
problems. They state that “Financial problems, such as overextended
credit, are one of many life events that can cause people to experience
the physical manifestations of stress (e.g., insomnia, migraines, anxiety)
that are associated with many health problems and/or to cut back on
recommended screening, prevention, and health maintenance
activities.” (p. 261).
3
Hence, all financial decisions would impact the individual's
financial satisfaction levels. Investor biases have been considered as
beliefs and attitudes, in the presence of which the investors are not
able to meet their stated financial objectives. This implies that the
presence of these biases would lead the individual to not be satisfied
with their financial position.
Financial satisfaction is a measure of financial well‐being
(Newman, Delaney, & Nolan, 2008; Wilhelm, Varcoe, & Fridrich,
1993). Financial satisfaction “is the degree to which individuals and
families have financial adequacy and security” (Xiao, Sorhaindo, &
Garman, 2006; p. 109). Financial satisfaction is the feeling that one
has been able to accomplish certain financial goals or met their specific
financial needs.
Cummins and Nistico (2002) stated that perceived satisfaction is a
product of cognition, as it involves “some comparative process
between current experience and internalized standards” (p. 41). They
further stated that life satisfaction is a result of a cognitive judgmental
process, which indicates that extent to which the individual's needs are
met, which could be in the form of fulfilling of some important desires
or meeting some goals. Diener, Emmons, Larsen, and Griffin (1985)
stated that “judgments of satisfaction are dependent upon a compari-
son of one's circumstances with what is thought to be an appropriate
standard. It is important to point out that the judgment of how
satisfied people are with their present state of affairs is based on a
comparison with a standard, which each individual sets for him or
herself; it is not externally imposed.” (p. 71).
Financial satisfaction is based on a cognitive judgmental process,
similar to life satisfaction (Diener et al., 1985). Hence, financial satis-
faction would be the product of the cognitive judgment pertaining to
the gap between the individual's experience of satisfaction with their
financial situation and the personal reference point in the individual's
mind. This evaluation in the individual's mind would give him or her
the indication of his or her level of financial satisfaction. If the individ-
ual in his or her opinion has performed above their indicative reference
point then, they that would increase their satisfaction and if otherwise
that would decrease their satisfaction. Satisfaction with ones financial
situation lies purely within the subjective realm of the individual, as
when making personal judgments of self, people reference themselves
against some internal standards (Cummins & Nistico, 2002; Diener
Various ways of measuring financial satisfaction have been
developed; however, no consensus has been reached among
researchers on the best way to measure financial satisfaction
(Joo, 2008; Joo & Grable, 2004). Subjective measures of financial satis-
faction include single‐item measures and multiple‐item measures.
According to Kahneman and Krueger (2006), “subjective well‐being
measures features of individuals' perceptions of their experiences, not
their utility as economists typically conceive of it. Those perceptions
are a more accurate gauge of actual feelings if they are reported closer
to the time of, and in direct reference to, the actual experience.” (p. 4).
Hence, the subjective measure of financial satisfaction is based on the
perception of the individual with regard to their financial position at a
point in time. These perceptions are as a result of the actual financial
decisions that have been made by the individual in the past that has
led to their current financial position.
4 SAHI
For the purpose of this study, financial satisfaction is defined as
“Satisfaction with one's present financial situation” (Joo & Grable,
2004). The financial situation of the individual is in terms of their pres-
ent financial status and also whether they feel that would be able to
meet future needs, on the basis of their present financial position.
Hence, the subjective assessment of satisfaction with one's financial
situation is based on reflective evaluations as one thinks back on the
various aspects of one's financial situation ( Kahneman & Riis, 2005).
The “financial situation” pertains to the various aspects of personal
financial management such as saving management, income, loans or
debts, and wealth management. Financial management refers to the
set of behaviours in the areas of cash management, credit manage-
ment, financial planning, investments, insurance, and retirement and
estate planning (Dowling, Corney, & Hoiles, 2009; Parrotta & Johnson,
1998). According to Draughn, LeBoeuf, Wozniak, Lawrence, and
Welch (1994), economic satisfaction consists of three components,
namely, financial adequacy, perceived economic well‐being, and satis-
faction with level of living. Hira and Mugenda (2000) considered finan-
cial management skills also as essential to the measure of financial
satisfaction, apart from satisfaction with savings level, debt level, cur-
rent financial situation, ability to meet long‐term goals, and prepared-
ness to meet emergencies. The measure that has been used in the
present study also looks at financial management skills (apart from
the other dimensions)—particularly three of them that came out of
the exploratory interviews—tax saving or tax planning, managing infla-
tion, and debt management.
The measure of financial satisfaction used in this study was based
on a multiple‐item scale that consisted of various dimensions on which
the individual had to indicate their financial satisfaction levels. These
dimensions were based on input from the literature (Berger, Powell,
& Cook, 1988; Hira, 1987; Hira & Mugenda, 2000; Joo & Grable,
2004; Loibl & Hira, 2005; Loibl & Hira, 2009) and the exploratory
interviews. The existing measures were adapted and modified for the
purpose of this study. The final dimensions on the basis of which indi-
vidual's perception of their financial satisfaction were measured were:
satisfaction with present level of income; satisfaction with money
available for meeting family necessities; satisfaction with ability to save
taxes or tax planning; satisfaction with ability to handle family's finan-
cial emergencies (e.g., medical expenses); satisfaction with ability to
pay back the amount of money owed (on debts, loans, credit card
payments due, etc.); satisfaction with present level of savings;
satisfaction with money available for future needs (house, children's
education, marriage, own retirement, etc.); satisfaction with ability to
manage money to protect from inflation.
The eight items of financial satisfaction scale were measured on
a five‐point Likert scale and was pilot tested and had a cronbach α
of .851.
4 | RATIONAL FOR THE PRESENT STUDY
People invest their money in order to achieve certain objectives. The
fulfillment of these objectives is essential for the well‐being of the
individual, as these objectives have implications for the present
circumstances and future lifestyle that the individual wishes for himself
or herself and their family. Due to the numerous investment avenues
and products, the choice of where to invest and how much, is a diffi-
cult one. This is so, because the individual has limited information
available and due to the constraints in their ability to effectively
process the available information, the individual resorts to certain
heuristics‐cognitive, affect based, or certain motives, to help in the
decision. When the individual continues to resort to these tools for
decision making over time, these develop into systematic tendencies
or biases that guide the decision behaviour, so that the individual is
able to achieve their financial objectives. Hence, the past decisions
made by the individual investor on the basis of the heuristics and
biases lead to outcomes that, when evaluated by the individual on
the basis of their internal standards, impact their financial satisfaction
levels.
The tool to measure whether the individual is satisfied with their
present financial position would throw light on whether the past
decision behaviour of the individual (which was based on certain
biases) led the individual to make investment decisions that they
believe in the present date to have helped them to be on the path
towards the achievement of their objectives. This would imply that
the systematic tendencies do in fact help in investment decisions
making and in enhancing individual's financial well‐being, and hence
should be incorporated in the financial advisory process.
Individual investor biases and their impact on financial decisions
and financial satisfaction have been little researched in not just the
Indian context but also across the world. This study is a part of a larger
study1 that pertains to the understanding the behavioural undercur-
rents of financial investment decisions. In earlier research based on this
larger study, the impact of individual investor biases, financial risk
taking, and perceived financial market knowledge was seen on the
preferences for financial investment products (Sahi, Dhameja, & Arora,
2012). Also, a segmentation profile of the investors based on the
investor biases was done, which found four segments of investors,
on the basis of the combinations of the biases that were predominant
in their personality (Sahi & Arora, 2012). However, in both these stud-
ies, the measures of the individual investor biases were not discussed.
Further, the various investor biases and their association with financial
satisfaction have not been researched earlier, in detail. Hence, this
study fills the following gaps in the literature:
1. There is little research on development of measures pertaining to
various individual investor biases in the context of financial
investment decision making.
2. The extant literature on financial satisfaction shows that previous
research studies have not studied the relationship of the individ-
ual investors' biases with financial satisfaction, in depth.
Though the study is conducted on Indian investors, the findings
can be of use to global readers. This is because biases are an inherent
part of being human, and these biases exist universally. Also, the vast
literature, in behavioral finance, which is mostly US–Europe based,
has shown that biases exist in financial decision making. Further,
investors' worldwide aim to achieve satisfaction with their financial
1
Doctoral thesis submitted
SAHI 5

situation, as is seen from various studies in financial satisfaction that experts have better knowledge and expertise and hence, would make
are predominantly US–Europe based. Hence, though the impact of more gainful investments. “One more feature about human nature, is
investor biases on financial satisfaction may vary in the degree or that we tend to trust our advisors entirely to the extent that we refuse
strength of the relationship in different context or cultures, however, to even use our common sense. Most of us will go ahead and invest in
the fact that a relationship is present can be accepted for the investor a stock or a mutual fund just because our broker or our friend or our
community globally. boss thought it was a good buy.” (Dutt, 1999; p. 3). Fischer and
Gerhardt (2007) stated that taking financial advice impacts the invest-
ment success. Reliance on expert bias is a form of authority bias, which
5 | H Y P O T HE S I S R E L A T E D T O I N D I V I D U A L is defined as “the tendency to take on the opinion of someone who's
I N V E S T O R S BI A S E S A N D F I N A N C I A L seen as an authority on a subject” (Evatt, 2008). People are more likely
SATISFACTION to be influenced by advice they receive from the experts when the
decision domain is difficult (Gino & Moore, 2007; Gino & Schweitzer,
5.1 | Overconfidence bias and financial satisfaction 2008). Studies have shown that financial planning and management
are considered as a very complex domain, and people have very poor
The first hypothesis in this category to be tested is related to overcon-
financial literacy levels (Altfest, 2004; Perry & Morris, 2005; Campbell,
fidence bias and financial satisfaction. For the purpose of this study,
2006; Lyons, Palmer, Jayaratne, & Scherpf, 2006; Shukla, 2007;
overconfidence bias is defined as the tendency to overestimate ones
Thorat, 2008; Pradhan, 2008; Sahi, 2009). Low levels of financial liter-
capabilities with regard to investment decision making. On the basis
acy lead to a high amount of emotional and mental stress due to the
of the analysis of the qualitative interviews, it was observed that the
inability of the individual to manage his or her finances effectively
overconfidence bias manifests in the form of over reliance on one's
(Drentea, 2000; Grable & Joo, 1999; O'Neill, Prawitz, Sorhaindo, Kim,
own ability and knowledge in making investment decisions. According
& Garman, 2006; O'Neill et al., 2005; Perry & Morris, 2005; Stone,
to Szyszka (2013), overconfidence can be manifested in three ways:
2004; Xiao et al., 2006). According to Srinivas (2000), “ Despite the
through people's belief that their knowledge and skills are above aver-
general motivation to exert control, there are situations when personal
age, their ability to interpret the information and make precise judg-
control is not desired, and is voluntarily relinquished to others,
ments, and illusion of control. Overconfidence is a cognitive bias that
primarily because giving up control may seem more attractive
manifests through excessively positive self‐perceptions or excessive
when compared to the onerous responsibilities that personal control
optimism, wherein the individual can be overconfident with respect
poses.” (p. 41).
to his or her abilities, knowledge, skills, and accuracy of predictions
Reliance on experts is a form of coping strategy as it is an attempt
(Friedman, 2007; Odean, 1999; Szyszka, 2013). Overconfident individ-
to reduce or tolerate the demands that are created in case of
uals tend to hold high views of their personal beliefs and abilities and
financial decisions, wherein the individual relinquishes his or her
have unrealistic wishful thinking (Barber & Odean, 1999; Friedman,
control or “off‐loads,” to those who they consider more capable, so
2007; Grinblatt & Keloharju, 2006; Szyszka, 2013), which leads to pos-
as to achieve the desired outcomes (Bandura, 1989; Engelmann, Capra,
itive expectations and optimism about their endeavors. The sense of
Noussair, & Berns, 2009; Fischer & Gerhardt, 2007; Fogel & Berry,
belief on their abilities to make sound financial decisions enables the
2006; Folkman & Lazarus, 1980; Grable & Joo, 1999).
investor to choose options that help them to achieve certain financial
Various studies have looked at the financial‐help‐seeking behav-
goals that would enhance their financial satisfaction. According to
iour for financial problems or financial‐counseling attitude (Dowling
Karmakar and Ghosh (2009), inspite of the scenario of economic
et al., 2009; Grable & Joo, 1999; Grable & Joo, 2001; Lown & Cook,
turmoil, the Indian consumer emerges as most confident, because they
1990). Financial counseling attitude has been studied with reference
believe in saving.
to financial satisfaction, and Dowling et al. (2009) in their study, saw
Thus, it is being hypothesized that there is a significant relation-
no association between financial counseling attitude and financial sat-
ship between overconfidence bias and financial satisfaction.
isfaction, whereas Grable and Joo (2001) found that individual seeking
H1 Overconfidence bias is positively associated with help from professional sources indicated higher levels of financial sat-
financial satisfaction. isfaction. Xiao et al. (2006) found that the single‐item “contacting a
financial planner” increased the financial satisfaction of the consumers.
Thus, it is being hypothesized that there is a significant relation-
5.2 | Reliance on expert bias and financial
ship between reliance on expert bias and financial satisfaction.
satisfaction
H2 Reliance on expert bias is positively associated with
This second hypothesis to be tested is related to reliance on expert
financial satisfaction.
bias and financial satisfaction. For the purpose of this study, reliance
on expert bias is defined as the tendency to rely on the advice given
by the financial expert. According to Fischer and Gerhardt (2007),
5.3 | Categorisation tendency and financial
“financial advisor as a person or organization that offers its profes-
sional financial expertise to individuals who seek assistance or want
satisfaction
to completely delegate their investment decisions.” (p. 18). The This third hypothesis in this category to be tested is related to
tendency to rely on expert advice manifest in the belief that the categorisation tendency and financial satisfaction. The operational
6 SAHI
definition of this construct for the purpose of this study is: the
tendency to categorize money into groups or categories based on
use and source of funds. Categorisation tendency is a mental account-
ing phenomenon (Shefrin & Thaler, 1988; Thaler, 1980; Thaler, 1999).
According to Rosch (1978), “the task of category systems is to provide
maximum information with the least cognitive effort.” (p. 28). Further,
he elabourated that it is to the advantage of people that categories are
formed as it helps to differentiate based on the purposes. People's
minds comprehend and archive information according to some catego-
rization schemes that allows people to easily “navigate their brain's
classification structure” (Pompian, 2006; p. 95), despite the fact that
this violates the fungibility principle (Thaler, 1999). People tend to
decompose their wealth in various categories called mental accounts,
and the marginal propensity to consume is account specific, making
some accounts more tempting to be invaded (Shefrin & Thaler, 1988;
Thaler, 1999). The broad classification of mental accounts is current
income, current assets, and future income, and this way, people know
which accounts they can fully exhaust, without bearing the pain asso-
ciated with exerting willpower, thereby increasing their utility (Shefrin
& Thaler, 1988; Thaler, 1999; Thaler & Shefrin, 1981). According to
Mogilner, Rudnick, and Iyengar (2008), “the mere presence of catego-
ries, irrespective of their content, positively influences the satisfaction”
(p. 202). The categorization effect leads to higher satisfaction
(Mogilner et al., 2008). Research has shown that categories serve to
differentiate between the items. The inability to perceive differences
(which could be achieved on account of categorization), would make
the individual feel a lack of control and thus lower the satisfaction
levels (Mogilner et al., 2008). Earmarking funds for a particulate pur-
pose prevent people from spending the money prematurely, thereby
generating benefits in the long run (Pompian, 2006). Earmarking funds
into various categories enables one to make investment choices that
would help in the fulfillment of the financial objective for which that
category was created. This would help the investors to meet their
short‐ and long‐term objectives, which gives a sense of security, which
would enhance financial satisfaction.
Thus, it is being hypothesized that there is a significant difference
between categorization tendency and financial satisfaction.
H3 Categorization tendency is positively associated with
financial satisfaction.
5.4 | Budgeting tendency and financial satisfaction
For the purpose of this study, budgeting tendency is being defined as
a tendency to plan for saving and investments.
According to Titus, Fanslow, and Hira (1989b), “how a family allo-
cates its limited resources influences its financial well‐being” (p. 311).
People who budget have expressed that “greater financial satisfaction
can be achieved through planning for expenditures” (Titus et al.,
1989b; p. 311). Further, as elaborated by Shefrin and Thaler (1988),
there are costs associated with “effort of willpower”; hence, people
make consumption expenditure from the current income account and
allocate their savings directly to the asset account. This helps in
increasing the utility of the individual. Despite the fact that as econo-
mists argue that money should be fungible, people prefer to make
budgets and track them regularly (Thaler, 1999; Thaler & Shefrin,
1981). Budgets can be made by deciding the saving and investment
decisions or the current spending decisions (Shefrin & Thaler, 1988).
Further, individual financial behaviour as indicated by budgeting,
cash‐management practices were found to be significantly associated
with financial satisfaction (Grable & Joo, 2004). However, Xiao et al.
(2006) found that following a budget or a spending plan has no
significant relationship with the financial satisfaction.
The exploratory interviews showed that people prefer to make
budgeting decisions by allocating their money towards saving and
investments first and then the remainder for spending. This behaviour
was also observed in the study by Jain and Joy (1997), where
they explained the importance of cultural factors in the determination
of saving and investment decisions and stated that Indians tend to
“… view wealth acquisition as necessary for the natural progression
of an individual's life …” and “… their need for saving determines their
consumption …” (p. 649). Hence, on the basis of the above discussion,
it is being hypothesized that budgeting tendency and financial
satisfaction are significantly related.
H4 Budgeting tendency is positively associated with
financial satisfaction.
5.5 | Adaptive tendency and financial satisfaction
Adaptive tendency refers to the tendency to adapt to the changing
financial requirements with the passage of time. Individuals need to
constantly adapt to constantly changing environment (Soros, 2003).
As the exploratory interviews showed that some people change their
investment patterns on the basis of the requirements of the changing
market situation. Further, on the basis of the investment goals, people
modify their investment portfolio accordingly. This allows people to
feel that they could incorporate the new trends and be in tune with
the market changes. If the individual is able to work towards the
achievement of the desired goals by adapting to the changes
with the passage of time, they see themselves able to meet their
needs and this would contribute to their satisfaction (Cummins &
Nistico, 2002).
Hence, on the basis of the above, it is being hypothesized that
adaptive tendency and financial satisfaction are significantly related.
H5 Adaptive Tendency is positively associated with
financial satisfaction.
5.6 | Socially responsible investing bias and financial
satisfaction
This is defined as the tendency to make decisions about buying, hold-
ing and selling investments, based on whether they are perceived as
acceptable according to the effects that certain companies' activities,
products and services can have on the environment and society at
large. The ethical dimension plays an important role in investment
decisions and people make investments in the companies, which they
deem ethical, even if the predicted gains are lower than others (Keller
& Siegrist, 2006a, 2006b; Nilsson, 2008; Williams, 2007). According to
Nilsson (2009), “by investing in Socially Responsible Investment (SRI),
SAHI
investors receive returns that are not in the form of financial gain.
Instead, investors can receive value by feeling that they contribute to
a worthwhile cause or do something for other people” (p.11). Accord-
ing to Fischhoff, Nadai, and Fischhoff (2001), “Investors are sometimes
dismayed to discover that they have invested in firms whose products
and conduct are deemed socially unacceptable …” (p. 100). Rosen,
Sandler, and Shani (1991) stated that “The Socially Responsible
Investor, invests in companies whose actions support social objectives
deemed desirable by the investor, e.g., reducing environmental
pollution (p. 221).” Hence, when people invest, taking the social
responsibility factor into consideration, it provides them with a sense
of satisfaction as it makes them feel that they are matching their
personal values with their investment goals. People who make socially
responsible investment would get more satisfaction (MacDonald,
2008). Nilsson (2008) stated that “consumer investment decisions are
not always only made with only profit maximizing rationality in mind.
Instead, socially responsible investors do, to a certain extent, incorpo-
rate their concerns about the environment and social issues into their
investment decisions” (p. 320–321). Webley, Lewis, and Mackenzie
(2001) in their study found that ethical investors were more committed
to ethical investments and continued to hold such investments, despite
of poor performance. Keller and Siegrist (2006b) in their study found
that certain segments of investors were more willing to undertake
social investing.
The exploratory interviews also showed that people felt good if
they were making investments taking the socially responsible factors
into consideration. Though socially responsible companies may be
giving less return, however, investors feel that long‐term investment
in these companies would be more secure.
Hence, on the basis of the above discussion, the hypothesis that
was raised was that socially responsible investment bias and financial
satisfaction are significantly related.
H6 Socially responsible investment bias is positively
associated with financial satisfaction.
5.7 | Spouse effect and financial satisfaction
This is the tendency to rely on the spouse for financial investment
decisions. Most people preferred to rely on their spouse for advice
and guidance when it came to investment decisions. Some people
prefer to confirm to the attitudinal and behavioural norms of their
reference groups (Mukherji, 2000). According to Lyons, Neelakantan,
and Scherpf (2008) “married individuals generally do not make
investment decisions on their own. Rather, their investment choices
tend to be influenced by their spouse, either because their spouse acts
as the household decision‐maker in financial matters or because the
couple makes joint financial decisions, possibly as an outcome of
intra‐household bargaining” (p. 62). Making joint decisions or involving
the spouse was so as to not create differences on account of finances.
According to Sung and Hanna (1998), “The positive spouse effect on
the investment decision implies that one spouse's decision influences
the other spouse's decision by sharing information on investment
choices” (p. 54). This way, funds were more optimally invested and
better investment planning was expected, leading to more financial
7
satisfaction. From the exploratory interviews, it was also observed that
when it came to financial planning and management activities, married
couples expressed a sense of satisfaction that they were taking the
consent of their spouse when making investment decisions and setting
financial goals or allowing they spouse to completely handle all matters
pertaining to financial decisions.
On the basis of the discussion above, the following hypothesis was
raised:
H7 Spouse effect is positively associated with financial
satisfaction.
5.8 | Self control bias and financial satisfaction
For the purpose of this study, self‐control bias is defined as a human
behavioural tendency that causes one to postpone the consumption
today so as to save for tomorrow. According to Shiller (2006), “the
weakness of human self‐control has come up repeatedly in consider-
ation of the personal savings rate, which swings up and down through
time for no obvious reason, and which at times is very low.” Shefrin
and Thaler (1988) elabourated that self‐control involves an “internal
conflict” between the “rational and emotional aspects of the individ-
ual's personality” (p. 611), “temptation,” as some consumption oppor-
tunities are more attractive and “willpower,” which involves an
excretion of effort. Precommitment is the restriction that is imposed
by the doer (who prefers to act in the interest of short‐run utility), on
the planner (who prefers to maximises long‐term utility), where both
the doer and planner are the dual nature of the human mind
(Antonides, 1996). An increase in willpower is essential if the doer
wants to reduce consumption, and this would involve a cost, and
hence, decrease in total utility. Hence, the planner has to resort to
techniques that achieve self‐control without an increase in
willpower costs. This would involve imposing of constraints called
precommittment devices that reduce the feasible consumption choices
for the doer and thereby reduce the costs associated with exerting
willpower and increase the utility (Shefrin & Thaler, 1988; Thaler,
1999; Thaler & Shefrin, 1981). “The lack of control over one's finances
exposes adults to financial risk in retirement, which can have adverse
and long‐term consequences” (Zurlo, 2009). Laibson, Repetto, and
Tobacman (1998) stated that people prefer automatic deductions as
they serve as commitment devices and make the decision‐making
process simple for the financial consumer. Little research has been
conducted to understand how domain specific control relates to finan-
cial satisfaction (Zurlo, 2009). Xiao et al. (2006) found that planning for
the future and increase in savings do contribute to increase in financial
satisfaction; however, sacrificing of current spending by participating
in flexible spending plans is negatively associated with financial satis-
faction. Various studies have found that financial behaviours that
included saving and cash management had a positive relationship with
financial satisfaction (Dowling et al., 2009; Grable & Joo, 2004;
Parrotta & Johnson, 1998). Zurlo (2009) study showed that control
over health and finances do not mediate the relationships between
the demographic and socioeconomic variables and financial satisfac-
tion. Cummins and Nistico (2002) in their review of studies from the
quality of life literature also found that need for control is positively
8 SAHI
linked to life satisfaction. Findings from the exploratory study also
revealed that people who invested in systematic investment plans,
pension plans, or put their money locked in regular investment
avenues exhibited a belief that they were able to make provisions for
their future.
Hence, on the basis of the above discussion, the following
hypothesis is being raised:
H8 Self‐control bias is positively associated with finan-
cial satisfaction.
6 | RESEARCH DESIGN AND
M E TH O DO LO GY
6.1 | Research design
A sequential mixed‐method approach was followed for this study
wherein the use of both qualitative and quantitative techniques were
applied. In the endeavor to understand the investors' biases, it is essen-
tial to inquire into the behaviour of the individuals and make meaning
with regard to the manifestation of the biases, which was done
through the qualitative interviews. This information when substanti-
ated with the existing knowledge on the major behavioural biases that
are stated in the literature was used to develop the instrument for the
individual investor biases. The essential aspect of the exploratory
inquiry was to not to ask the informants explicitly on their biases but
to understand the underlying beliefs and preferences of the informants
that were later analyzed by the researcher to understand the underly-
ing bias. Sahi, Arora, and Dhameja (2013) present the detailed findings
of the qualitative study.
Thus, in the qualitative phase of the study, interviews were
conducted to explore the phenomenon of investor biases in financial
decisions. In‐depth interviews were conducted with 30 individual
investors to understand the manifestation of the investor biases and
other psychological aspects that impact financial investment decision
making and financial satisfaction. These interviews were analysed,
and the observations pertained to various biases and other aspects
that impact the investors' choices and their financial satisfaction were
analysed (Sahi et al., 2013). The study was further complemented by
several, detailed discussions with people from the industry who were
engaged in financial advisory services. The discussion areas with the
11 financial experts focused on the following:
• Factors that potentially influence the customer's choice of
investment alternatives;
• What consideration is made when giving investment advice to the
clients, that is, on what basis do the experts decide to suggest
particular investments to the clients;
• Financial awareness and knowledge level of the clients and in what
domain the gap is observed; and
• How the clients risk taking ability is gathered? Any tools?
This was helpful in defining the construct domain, led to practical
recommendation concerning data collection and provided basis for
item generation. On the basis of the extensive literature review, in‐
depth interviews with individual investors and domain experts, the
research construct and subconstructs were defined, and the individual
investor biases scale was developed, after pilot testing. Although
approximately 450 individual investors were approached for participa-
tion in the study, only 405 respondents agreed, giving a response rate
of 90%. Of the respondents who agreed, only 377 responses were
considered for final data analysis because the remaining questionnaires
were not considered after data validation checks.
6.2 | Research context
Only the “investing classes” or people having the financial savings and
the capacity to invest in the various instruments were of significance
to this study (Gupta, 1991). The investing class in India is a subset
of the middle and upper classes and a combined economic–
occupational–educational criterion to define the investing class would
be relevant (Gupta, 1991). Hence, the socioeconomic classification
(SEC), which is based on the occupation and education criteria, were
referred for selection of the investing class. Categories A1 and A2 in
the SEC grid2 (used as a market segmentation tool in India) was of
relevance for this study, as these categories have evidence to show
that they have a higher income level than the other categories, hence,
belong to the investing class. Hence, individual investors who have
been making financial investments for at least the last 2 years and
belong to the A1 or A2 population segment defined the context of
the study. This category had also got higher scores on the Household
Potential Index, which measures the affluence level of the households.
6.3 | Respondents selection
6.3.1 | Sampling technique and data collection method
Nonprobability sampling technique was used for this study.
Nonprobability sampling techniques are increasingly used when the
purpose of the study is not to achieve statistical generalizations but
to examine the relationship between variables and or the differences
between the groups (Gliner, Morgan, & Leech, 2009). In case of
nonprobability sampling, the probability with which the unit would
be selected is unknown and the researcher purposively selects the
unit, “so that they will best help the investigator to understand the
research problem” (Gliner, Morgan, & Leech, 2009; p. 124). Further,
nonprobability methods are useful when the “investigator is primarily
interested in the relationship between variables and may assume that
the relationship will hold up in a wide variety of human participants”
(Gliner, Morgan & Leech, 2009; p. 126). Nonprobability methods were
used in this study as the list of population units was not available
(in the case of this study—the list of investors). Further, due to the con-
fidential nature of financial investment information, only those respon-
dents who were willing to participate in the study were given the
2
http://www.indiastat.com/table/civilsuppliesandconsumeraffairs/4/
socioeconomicgroups/18226/18229/data.aspx https://indiaretailbiz.wordpress.
com/2006/10/15/socio‐economic‐classifications‐sec‐categories/http://www.
ramabijapurkar.com/demand‐drivers/126‐calibrating‐sec‐classifications‐in‐
terms‐of‐relative‐purchasing‐power
SAHI
questionnaire; hence, non‐probability‐based sampling was considered
most appropriate (Wood & Zaichkowsky, 2004).
Thus, the sampling technique for the qualitative phase of the study
was based on criterion and snowball sampling. Sahi et al. (2013)
present details on sampling and the data collection method for the
qualitative phase of the study. For the selection of experts, a purposive
sample of interviewees was chosen from a range of financial service
organizations having experience of working or dealing with the
consumers of financial services, as well as academic experts.
Interviewees were chosen on the basis of their detailed knowledge
of financial services provisions, the policy context, and/or the needs
of individual investors. The sampling strategy employed here was
criterion sampling, wherein the experts were searched on the basis
of certain criteria (Patton 1990; Kuzel 1992). To qualify for the inter-
view, the expert was required to be a person who has domain specific
knowledge in the field of financial services with greater than 5 years
experience. A purposive sample of interviewees was chosen from a
range of financial services. Expert interviews were conducted with
11 domain experts consisting of six relationship managers, two sales
managers, one AVP‐finance, one VP‐finance, and one director‐finance.
For administering the final survey, the sampling method used for
selecting a representative sample was through the combination of
judgment and snowball sampling methods.
In the first step, judgment sampling was used. This is a procedure
in which the researcher selects a sample that is expected to serve the
research purpose and is most appropriate for the study (Churchill,
2001). In case of judgment sampling, the population elements are
purposively selected so as to provide the information needed for the
purpose of the research (Parasuraman, Grewal, & Krishnan, 2007).
Hence, in the first stage, few respondents were identified (through
contacting a financial advisor; associates of the researcher who were
making financial investments; and from neighborhood) and they were
asked to suggest others who would fulfill the criteria. Thus, the next
stage involved snowball sampling, which is a process of selecting the
respondents on the basis of networks.
6.3.2 | Unit of analysis
Because the financial investment decision behaviour is defined from
the individual investor's perspective, hence, the individual decision
maker in the household was the unit of analysis for this purpose and
all constructs are measure from the individual investor's perspective.
“For studying savings and investment habits, it is better to treat the
household as the unit and focus on its decision maker” (Gupta, 1991;
p. 43). Household head, as the decision maker for the family with
regard to investments or the active decision maker in the household,
was the unit of analysis, although other family members and even
outsiders may have influenced his or her decisions. So, a
questionnaire was filled by the household head or active decision
maker in the house.
6.3.2.1 | Criteria for selection of the respondents
• A resident of the National Capital Region (NCR) of Delhi, India;
• The respondent must have been making financial investment
decisions in his or her household, at least since the last 2 years;
9
• Respondent's family should belong to SEC of India—A; and
• Respondent must have investments in at least three investment
categories. The investment categories considered for the survey
were insurance, post office savings, fixed deposits or recurring
deposits, mutual funds, public provident fund or employee
provident fund, equity, bullion, real estate, and cash.
6.3.2.2 | Questions that were asked to customers before
beginning the survey
1. What is the highest qualification of the chief earner in your
family?
2. What is the occupation of the chief earner of your family?
3. Have you been involved in making financial investment decisions
of your household?
4. If yes to Q3, then for how many years?
5. In how many of the investment categories as listed, do you have
investments?
6.4 | Respondents profile
About 81% of the respondents were men, and the remaining 19%
women. About 11% of the respondents were in the age bracket of
20–35 years, 56% in the age bracket of 26–35 years, about 20% in
the bracket of 36–45 years, and the remaining 13% between 46 and
65 years and above. About 83% of the respondents had a postgradu-
ate or a professional degree. About 72% of the respondents were
married, and the remaining single. Approximately 51% of the respon-
dents were in private service, about 33% were in government service,
and the remaining in other occupational profiles such as professional
practice, own business, and so forth. The respondents showed a
diverse work experience, with about 33% having less than 5 years,
about 36% having between 5 and 10 years of experience, 25% having
between 10 and 20 years of experience, 10% between 20 and 30 years,
and the remaining more than 30 years. About 74% of the respondents
lived in a nuclear household, and the remaining in a joint household.
With regard to the per annum income distribution, although 13% of
the respondents were earning between Rs. 3–5 lakhs3, 38% were
earning between Rs. 5–10 lakhs, about 30% between Rs. 10–20 lakhs,
and the remaining about 17% above Rs. 20 lakhs per annum. About
48% of the respondents had a saving rate between 20% and 30%,
about 20% had a saving rate less than 20%, and about the same
percentage of people had a saving rate between 30% and 40%. About
61% of the respondents stayed in their owned accommodation, and
the remaining in a rented accommodation. Finally, with regard to the
investment tenure, although 21% of the respondents had been making
investments at least since the last 2 years, 30% had between 2 and
5 years of investment experience, about 23% had between 5 and
10 years of investment experience, and about 25% had more than
10 years of investment experience.
3
1 lakh = 100,000
10
6.5 | Questionnaire and pilot testing
The questionnaire was put through various rounds of pilot testing
(see Section 7 for details of pilot testing), wherein the validity and the
reliability of the constructs were checked. The final data were
collected from 377 respondents, and the hypothesis testing was based
on the eight investor biases and their relationship with financial
satisfaction. Apart from the items of the individual investor biases scale,
financial satisfaction, the questionnaire also asked for various demo-
graphic and socioeconomic information from the respondents. Finan-
cial risk taking attitude was also measured for the purpose of this
study. The scale used by Lampenius and Zickar (2005) was modified
and adapted for this study. Financial risk taking attitude in the study
was measured on two dimensions, namely, risk control ( which was
defined as, “the individual's tendency towards the risk‐averse side”)
and speculative risk (which was defined as, “the individual's tendency
towards the risk‐taking side”). Risk control consisted of six items with
reliability of 0.799 and speculative risk construct consisted of six items
with reliability of 0.805, on the final sample.
6.6 | Sample size
Though the purpose of the study was to achieve analytic generaliza-
tion, that is, generalizing to theoretical propositions and not statistical
generalizations, wherein inferences are drawn from data to a popula-
tion, yet for the sufficiency of the sample size, the formula used in case
of statistical generalisation was considered. The formula for the sample
size (N) determination that was used is
N = z2 * σ 2/D2;
z = confidence interval 95%, 1.96;
σ2 = variance;
D = precision.
The pilot data was used to define the sample size by calculating
the estimated population SD. The standard deviation in the pilot
study, ranged from 0.72 to 1.41. With the SD of 1.41 at a
precision level of 0.15 and at 95% confidence level (z = 1.96), the
required sample size was 339. The final study was conducted on
377 respondents.
7 INDIVIDUAL INVESTOR BIASES SCALE
| Table 3, we can infer that seven factors emerged that had eigenvalues
DEVELOPED
Individual investor bias for the purpose of this study refers to the
tendency towards a certain disposition that guides the decision maker
to a judgment in circumstances pertaining to investment decision
making.
Because a scale to measure the individual investor biases was not
found in the literature, it was developed for the purpose of this study.
In order for a scale for biases of individual investors to be developed,
set of items were developed for the constructs that were initially
identified from the exploratory phase participants and the literature
(Sahi et al., 2013). The constructs were further evaluated by the
domain experts for possibility of clubbing or reducing the constructs.
At least three to four items were generated for each variable. The total
112 items were qualitatively analysed by experts, and the final list
SAHI
consisted of 97 items. Five‐point Likert scales were used for the collec-
tion of responses on the investor biases items, with choices from
strongly disagree, disagree, neither disagree nor agree, agree, and
strongly agree. Two pilot studies were conducted to refine the con-
structs, with a sample of 154 respondents in the 1st pilot and 120 in
the 2nd pilot. Post the pilot studies, 34 items emerged that
converged into 12 factors that explained overall 71.291% of the
variance in the data. All the factors had cronbach α reliabilities
between .5 and .8, and each factor in itself explained at least 50% of
the variance in the data. All items had loadings greater than 0.5.
The results indicated that there are 12 common investor biases
that impact the investors' financial investment decisions. Eigenvalues
greater than 1 was used as a criteria for retention of factors (Hinkin,
1995). Items with loadings lesser than 0.5 and items that were cross‐
loading, that is, an item loading close to 0.5 on more than one factor,
were removed.
It was further seen that when the “mental accounting construct”
was analysed independently, this construct could be divided into two
categories, namely, categorisation tendency and budgeting tendency.
Hence, it was divided and the reliabilities of this construct were
calculated independently. In addition, item to total correlations within
each construct was inspected, and coefficients of the items taken
forward were all greater than 0.3. The reliabilities and the percentage
of variance explained by each of these 12 biases were as follows
(Table 1).
Table 1 shows that after conducting the pilot studies, the reliability
of each of the biases was more than 0.5 and the items of the bias
explained more than 50% of the variance in each case. On the basis
of the results of the two pilot studies, the questionnaire was adminis-
tered on the final data of 377 respondents. The data were checked for
normality of the various metrics. Factor analysis was conducted again
to reconfirm the structure of the factors on this larger sample. The
Kaiser–Meyer–Olkin measure of sampling adequacy was found to be
0.710 and the Bartlett's test of sphericity was significant
(χ2 = 1,865.379, p = .000). The results of the factor analysis are given in
Table 2.
As can be seen from Table 2, the sample size for the final study
was sufficient for the purpose of conducting the factor analysis. These
tests indicate the suitability of the data for structure detection. From
greater than 1 and these factors in total explained around 60% of the
variance in the data. Of these seven factors, mental accounting bias
that emerged was check for the possibility of subdivision of the items,
and it was found that similar to the pilot studies, this construct
subdivided into budgeting tendency and categorization tendency.
Hence, post the pilot studies, eight biases emerged, which were put
to hypothesis testing.
Comparing with the pilot studies results, we found that the
constructs regret aversion tendency, status quo bias, and illusion of
control and anchoring bias did not demonstrate sufficient convergent
and discriminant validity by loading to a sufficient extent on the
underlying factor and did not fit into the interpretation of the results,
and hence, these items were deleted. The minimum loading that was
considered as the cutoff point, for the items, was 0.50. Items below
this benchmark were deleted. Further, the constructs mentioned
SAHI 11

TABLE 1 Post pilot studies: individual investor biases identified

Measure/construct Number of items Reliability % of variance explained

Reliance on expert bias 4 0.797 62.43

Overconfidence bias 4 0.717 54.75
Mental Accounting 4 0.742 57.19
Categorization Tendency (2 items) 0.728 78.65
Budgeting Tendency (2 items) 0.534 68.28
Adaptive tendency 3 0.64 58.46
Self‐control bias 3 0.626 57.53
Spouse effect 2 0.778 81.91
Socially responsible investing bias 3 0.61 56.45
Regret aversion 3 0.545 52.94
Status quo 3 0.516 51.15
Illusion of control 3 0.567 54.09
Anchoring 1 N.A.
Hindsight 1 N.A.
Total items 34

TABLE 2 Total variance explained for final individual investor bias scale
Total variance explained
Initial eigenvalues Extraction sums of squared loadings Rotation sums of squared loadings
Component Total % of variance Cumulative (%) Total % of variance Cumulative (%) Total % of variance Cumulative (%)

1 3.283 14.272 14.272 3.283 14.272 14.272 2.416 10.506 10.506

2 2.935 12.760 27.032 2.935 12.760 27.032 2.244 9.756 20.261
3 1.808 7.862 34.894 1.808 7.862 34.894 2.085 9.067 29.328
4 1.676 7.288 42.183 1.676 7.288 42.183 1.834 7.972 37.300
5 1.507 6.552 48.734 1.507 6.552 48.734 1.827 7.943 45.243
6 1.433 6.231 54.965 1.433 6.231 54.965 1.811 7.872 53.115
7 1.236 5.374 60.339 1.236 5.374 60.339 1.662 7.224 60.339
8 .914 3.974 64.314
9 .837 3.639 67.952
10 .778 3.383 71.335
11 .727 3.162 74.497
12 .666 2.894 77.391
13 .642 2.792 80.183
14 .611 2.656 82.839
15 .581 2.526 85.365
16 .510 2.217 87.582
17 .480 2.087 89.669
18 .470 2.044 91.713
19 .446 1.941 93.654
20 .398 1.731 95.385
21 .378 1.642 97.027
22 .369 1.605 98.632
23 .315 1.368 100.000

above had very low cronbach α reliability scores, that is, below .4. The
one item of hindsight bias loaded on the overconfident bias. Table 3
details the cronbach α, interitem correlations, and the item to total cor-
relations for the deleted items.
The mean, standard deviation, factor loadings of items, total vari-
ance, and reliability of the final investor biases constructs are given in
Table 4. Table 4 also lists the items that comprised each of the investor
biases that emerged from the final study.
The correlations of the eight investor biases with each other are
presented in Table 5. The correlations were found on the basis of the
summated scores of the various constructs. MacKenzie, Podsakoff,
and Podsakoff (2011) state that for assessing the discriminant validity
12
TABLE 3 Deleted constructs (before hypothesis testing)
Cronbach α Interitem
correlations
Regret aversion tendency .329 <.20
Status quo bias .317 <.20
Illusion of control bias .293 <.20
Anchoring bias N.A. N.A.
of the constructs, the intercorrelations between the constructs should
be less than .71. As can be seen from Table 5, the correlation coeffi-
cients though are significant in a few cases but the values are quite
low; hence, the 8 investor biases are distinct.
The constructs of financial satisfaction were also checked for their
loadings and reliabilities. Financial satisfaction construct, which com-
prised of eight items, were all loading on a single dimension, and all
items had loading above 0.5. The reliabilities of the individual investor
biases and the other constructs used in the study, on the final data,
were all above 0.60 and were judged to be acceptable (Nunnally,
1967). Table 6 states the mean, standard deviation, factor loadings of
items, total variance, and reliability of the financial satisfaction
construct.
Table 6 shows that the eight items of the financial satisfaction
scale all had loadings greater than 0.6 and the cronbach α of the scale
was .851, which shows that the scale is reliable for it to be used for
further analysis. The five‐point Likert scale was used to measure
financial satisfaction sores, ranging from 1 denoting very dissatisfied
to 5 denoting very satisfied.
When the correlations analysis between investor biases and
financial satisfaction was conducted, it was found that only three
biases had significant correlations with the financial satisfaction scale.
The correlation were found significant for overconfidence bias
(r = .208, p < .01), self‐control bias(r = .325, p < .01), and budgeting
tendency (r = .284, p < .01)
8 | DATA ANALYSIS TECHNIQUE
According to Allen and Seaman (2007), one can analyze Likert
scales as interval values if the sets of Likert items can be
combined to form indexes. “Also, the combination of scales to form
an interval level index assumes this combination forms an underly-
ing characteristic or variable” (Allen & Seaman, 2007; p. 65).
Further, they elabourate that this requires the resulting index to
pass the test of validity, for example, cronbach α. Hence, because
each construct pertaining to the biases and the financial satisfac-
tion construct had multiple items that measure the same underlying
construct and was found to have acceptable cronbach α reliabil-
ities, regression was conducted for hypothesis testing. The depen-
dent variable was the investor financial satisfaction and the
independent variables were the eight investor biases. The sum-
mated scores of the eight biases and the financial satisfaction scale
were used. Regression was conducted in two parts. First, all the
SAHI
Item to total
correlations Result
<.30 Deleted
<.30 Deleted
<.30 Deleted
N.A. Loading to another construct
which was not meaningful;
hence deleted
eight biases were tested with the financial satisfaction measure
to find out which biases emerged in the model as significant. In
the second case, each bias was individually regressed with financial
satisfaction.
9 | RESULTS: INDIVIDUAL INVESTOR
BIASES AND FINANCIAL SATISFACTION
Multiple regression was conducted with the eight biases as indepen-
dent variables and financial satisfaction as the dependent variable. A
significant regression equation was found, F(8,336) = 8.579, p < .001,
with an R2 of 0.170. Only three biases were found to be significantly
predicting the investor's financial satisfaction levels, namely, overcon-
fidence bias, β = .108, t(336) = 1.962, p = .051; self‐control bias,
β = .269, t(336) = 5.133, p < .001); and budgeting tendency, β = .206,
t(336) = 3.607, p < .001). The assumptions of regression were met:
No Autocorrelation, Durbin–Watson = 1.761; no multicollinearity
(All VIF values are well below 10; tolerance values were well above
.2; assumption of linearity and homoscedasticity met (well‐scattered
plot between ZRESID and ZPRED) and normality of residuals checked
with histogram and P‐P plots.
In order to remove the impact of any correlation (even little)
between the biases and financial satisfaction, we also conducted sim-
ple regressions for each of the biases with the financial satisfaction,
for hypothesis testing. This was to see how the bias independently is
associated with financial satisfaction.
Table 7 summarises the hypothesis testing results of the individual
investor biases and financial satisfaction on the basis of simple regres-
sion. As can be seen from the adjusted r‐squares values, in case of
hypothesis pertaining to overconfidence bias, self‐control bias, and
budgeting tendency, although the overall model is statistically signifi-
cant, a very small percentage of the financial satisfaction is explained
by the independent variables. The r‐square values were 4.1% for over-
confidence bias, 10.3% for self‐control, and 7.8% for budgeting ten-
dency constructs in their ability to explain the financial satisfaction
construct.
Evidence in the literature exists for a statistically significant rela-
tionship between two variables (p < .05) but very low r‐square values.
The low values of R‐squares, values less than 0.3 (and in some cases
even below 0.1), have also been reported in earlier studies on financial
satisfaction (Krannich, Riley, & Leffler, 1988; Hira & Nagashima, 1989;
Titus et al., 1989b; Hira, Fanslow, & Vogelsang, 1992; Lown & Ju,
1992; Mullis, 1992; Sumarwan & Hira, 1993; Wilhelm et al., 1993;
TABLE 4 Mean, standard deviation, factor loadings of items, total variance, and reliability of the investor biases constructs
SAHI

Factors and loadings

Total
Budgeting Socially variance
Standard Reliance Self‐ tendency/ responsible Cronbach explained
Mean Deviation on expert Overconfidence control categorisation Adaptive investing Spouse α of the by the
Construct Items of item (of item) bias bias bias tendency tendency bias effect factor factor (%)

Reliance on expert bias—a I base my investment decisions upon the 3.1592 .99794 0.804 .777 59.99
tendency to rely on the suggestions of the investment advisor.
advice given by the I consult an investment advisor before 2.9576 1.07104 0.783
financial expert. making an investment decision.
I let my investment advisor make my 2.4679 .98121 0.746
investment decisions for me.
Investments do well, if guided by advisors. 3.3351 .97403 0.71
Overconfidence bias—a I can make more accurate investment 3.0477 .85853 0.766 .683 51.72
tendency to overestimate decisions, than others.
ones capabilities with regard I am at par with the knowledge of financial 2.3803 .98876 0.726
to investment decision experts.
making. I am a smart investor. 3.0718 .97579 0.689
With respect to investment decisions and 2.8462 .93836 0.588
their outcomes, I have experienced the
feeling “I knew it all along.”
Self‐control bias—a human I find it difficult to control my expenditure 3.6649 1.11209 0.802 .693 62.05
behavioural tendency that and am not left with anything for
causes one to postpone the investments (R).
consumption today so as to I am not able to save for my future (R). 3.8537 1.03403 0.779
save for tomorrow. If I have the money, I will consume it (R). 3.6203 1.02002 0.723
Categorization tendency—a I split my money into separate account 3.3767 1.29905 0.774 .581 70.68
tendency to categorise heads based on the use that I would
money into groups or put it for (e.g., children's education,
categories based on the use marriage, and retirement).
and source of funds. I keep my money into separate accounts 3.0293 1.13368 0.691
based on the source of the money.
Budgeting tendency—a When I receive income, I first put some 3.4053 1.15438 0.591 .652 74.19
tendency to plan for saving money aside for saving and investments.
and investments. I have a pre‐established monthly budget 3.0771 1.12281 0.546
for investments.
Adaptive tendency—the My investment pattern has changed over 3.7128 .94795 0.734 .605 55.88
tendency to adapt to the the years.
changing financial Investment decisions get impacted by 4.0853 .81639 0.694
requirements with the market fluctuations.
passage of time. My investment choices differ, based on the 3.7846 .80920 0.677
financial goals that I have to achieve.
Socially responsible investing Companies that follow the ethical practices 3.8753 .90380 0.783 .636 58.32
bias—the tendency to make attract me more (e.g., honesty, integrity,
decisions about buying, and fairness in dealings with the
holding, and selling of stakeholders).
investments, based on Companies that are founded on a system 3.7273 .85423 0.758
whether they are perceived of corporate values turn out to be good

(Continues)
13
14 SAHI

Parrotta & Johnson, 1998; Loibl & Hira, 2005; Xiao et al., 2006;

factor (%)
Cronbach explained
variance

by the

81.68
Total
Roszkowski & Grable, 2007; Dowling et al., 2009). Further, all the
above studies have multiple independent variables.
Similarly, various studies in investor psychology have also reported
investing Spouse α of the
factor
adjusted r‐square values below 0.3 and in some cases, even below 0.1

.775
(Lewellen, Lease, & Schlarbaum, 1977; Mullis, 1992; Wilhelm et al.,
1993; Palsson, 1996; Donkers & Van Soest, 1999; Biais, Hilton,
effect

0.869
0.89
Mazurier, & Pouget, 2002; Schwarzkopf, 2003; Dorn & Huberman,
2005; Steul, 2006; Menkhoff, Schmidt, & Brozynski, 2006; Xiao
responsible

et al., 2006; Davar, 2007; Nosic & Weber, 2007; Dowling et al.,
Socially

0.716
bias

2009). All the studies cited above have multiple independent variables
in the models.
Hence, as with similar regressions, the coefficient of determina-
tendency
Mean Deviation on expert Overconfidence control categorisation Adaptive

tion for the ability of the individual investors' biases to predict finan-
cial satisfaction is also low. Investor behaviour is a complex domain,
Factors and loadings

and accurate information in this realm is difficult to obtain as many

tendency/
Budgeting

tendency

times people are unaware that they hold a certain predispositions

towards a subject (Udell, 1965), and hence, ability of models that
incorporate such dimensions to show very high coefficients of deter-
mination is less.
Self‐

bias

Thus, results indicated that overconfidence bias, self‐control bias,

and budgeting tendency have a positive and significant relationship
with financial satisfaction.
Hence, the three hypotheses as discussed above were accepted at
bias

a p < .01, on the basis of the simple regression analysis. The rest of the
relationships as the results showed were not significant, and hence, the
hypotheses were rejected. However, as will be discussed in the
Standard Reliance

subsequent section, there were certain categories of the profiles, in

bias

which the hypotheses (which were overall rejected), were found to

be holding true.
.95644

.98386

.92685
of item (of item)

1 0 | D I S C U S S I O N O F H Y P O T H E S I S T E S TI N G
3.5279

2.9894

3.8143

R ES U L TS OF P S YC H OG RA P HI C V A R I A BL E S
AND FINANCIAL SATISFACTION AND
F U R T H E R I N S I G HT S
ongoing corporate social responsibility

My spouse has a major influence on my

decisions (please answer, if married)

(CSR) activities (e.g., participation in
environment, customer satisfaction,

I would invest in companies that have

investment decision making (please

quality improvement, and integrity)

I involve and consult my spouse with

This section discusses the results of the hypothesis testing and their
regard to saving and investment
development, and sustainable
investments (e.g., concern for

social upliftment, community

implications. It also highlights that those hypothesis that were not

accepted on the basis of the regression analysis on the complete sam-
Items

ple were found to be holding true when the sample was controlled for
answer, if married).

some demographic and socioeconomic variables. This gives new

development).

insights into the phenomenon and paves the way for further research
in investor psychology.

10.1 | Overconfidence and financial satisfaction

as acceptable according to

products, and services can

Spouse effect—the tendency

The hypothesis that overconfidence bias is positively and significantly

have on the environment

to rely on the spouse for

the effects that certain

related to financial satisfaction is accepted. This implies that the

companies' activities,

and society at large.

financial investment
(Continued)

tendency to overestimate ones capabilities with regard to investment

decision making is positively and significantly related to financial
satisfaction. Overconfident investors feel that they can complete
decisions.
Construct

difficult tasks such as picking winning stocks, successfully, and have

TABLE 4

more accurate knowledge than others (Baker & Nofsinger, 2002;

Brabazon, 2000; Goetzmann & Kumar, 2007; Odean, 1999; Szyszka,
SAHI 15

TABLE 5 Correlation coefficients of the factors of the individual investor biases construct
Self‐ Socially
Reliance on Overconfidence control Categorisation Budgeting Adaptive responsible Spouse effect (only
expert bias bias bias tendency tendency tendency investing bias for married; n = 270)

Reliance on expert bias 1.000 −0.174** −0.167** 0.097 0.017 0.064 0.087 0.179**
Overconfidence bias 1.000 0.145** 0.175** 0.339** 0.156** 0.096 0.031
Self‐control bias 1.000 0.023 0.241** 0.087 0.039 ‐0.029
Categorisation tendency 1.000 0.319** 0.248** 0.090 0.176**
Budgeting tendency 1.000 0.074 0.144** 0.172**
Adaptive tendency 1.000 0.208** 0.179**
Socially responsible 1.000 0.129*
investing bias
Spouse effect(only for 1.000
married; n = 270)

**p < .01.

*p < .05.

TABLE 6 Mean, standard deviation, factor loadings of items, total variance, and reliability of the financial satisfaction construct
Standard Financial Cronbach Total variance
Mean deviation satisfaction— α of the explained by
Items of item (of item) item loadings factor the factor

Financial satisfaction—satisfaction Satisfaction with: .851 49.15%

with one's present financial situation.
(Joo & Grable, 2004)
Present level of savings 3.2231 .95517 .741
Ability to handle family's financial emergencies 3.6622 .84387 .739
(e.g., medical expenses)
Money available for future needs (house, 3.0322 .99679 .731
children's education, marriage, own
retirement, etc.)
Ability to manage money to protect from 3.1968 .93157 .727
inflation
Money available for meeting family necessities 3.7173 .80778 .716
Ability to save taxes/tax planning 3.5882 .90662 .663
Ability to pay back the amount of money 3.8730 .80485 .659
owed (on debts, loans, credit card payments
due, etc.)
Present level of income 3.3280 .90845 .624

TABLE 7 Hypothesis testing results: simple regression of individual investor biases on financial satisfaction
Adjusted Unstandardised Standardised
Variable R‐square F‐statistic Significance coefficients (B) coefficients (beta) p value Result

Reliance on expert bias −0.002 0.179 0.672 −0.018 −0.022 .672 Reject
Overconfidence bias 0.041 16.258 0.000 0.191 0.208 .000 Accept
Self‐control bias 0.103 42.233 0.000 0.243 0.352 .000 Accept
Categorization tendency 0.003 2.061 0.152 0.046 0.075 .152 Reject
Budgeting tendency 0.078 31.472 0.000 0.181 0.284 .000 Accept
Adaptive tendency −0.002 0.182 0.670 0.022 0.023 .670 Reject
Socially responsible investing bias −0.002 0.213 0.645 0.022 0.024 .645 Reject
Spouse effect ( only for married; n = 270) −0.001 0.679 0.411 0.032 0.051 .411 Reject

2013) and thus tend to undertake risk taking decisions (Nosić &
Weber, 2010).
Some studies have found that overconfidence reflects itself
through “too little diversification,” because of a tendency to invest
too much in what one is familiar with and studies have shown
that more overconfident people experienced below average results
(Barber & Odean, 2001; Beyer & Bowden, 1997; Goetzmann &
Kumar, 2007; Ritter, 2003). However, the results of this study
support the hypothesis that overconfidence behaviour is positively
linked to individual's financial satisfaction levels. This has been
16
earlier observed in studies that show that overconfidence behaviour
is related to self‐esteem and people with high self‐esteem perform
better in their tasks (Johnson & Flower, 2009; Nelson & Quick,
2008). Overconfidence bias is not a flaw of the human mind, but it
is normal human thought and this positive self‐evaluation is essential
for the mental health and general well‐being of the individual
(Haselton et al., 2005; Taylor & Brown, 1988).
Financial investment decision making is a complex domain, and the
decision maker has to rely on his judgment and skills in the selection of
the most appropriate investments for his or her portfolio. The process
of investment requires the investor to part with his money today, for
some gains in the future. Parting with one's money is a painful process,
and due to the plethora of investment possibilities in the market, along
with the complexity of the financial products, the investor can often
feel helpless, and this could impact his or her mental balance. Positive
illusions and positive self‐evaluations allow the individual to maintain
his or her mental well‐being and to feel in control of their lives. This
would allow them to take decisions not from the emotions of panic
and fear, but of confidence and empowerment, which would lead to
higher satisfaction. As this study explored, Overconfidence helps the
individual to trust their abilities to manage money better, which helps
in taking interest in financial planning activities, and the setting of
financial goals and targets, and exploring those investments that help
in achieving their objectives. This enables the individual to experience
financial satisfaction.
10.2 | Reliance on expert and financial satisfaction
The hypothesis that reliance on expert bias is positively and signifi-
cantly related to financial satisfaction is rejected. The tendency to rely
on the advice given by a financial expert has been stated to impact
investment success, as many people have been seen to have low finan-
cial literacy levels when it comes to a complex decision domain such as
financial investments, and reliance on experts helps them to cope with
the demands of financial decision making (Folkman & Lazarus, 1980;
Bandura, 1989; Grable & Joo, 1999; Perry & Morris, 2005; Campbell,
2006; Fogel & Berry, 2006; Lyons et al., 2006; Fischer & Gerhardt,
2007; Shukla, 2007; Gino & Moore, 2007; Gino & Schweitzer, 2008;
Thorat, 2008; Engelmann et al., 2009).
Both Grable and Joo (2001) and Xiao et al. (2006) found that an
individual seeking help from professional sources or those “contacting
the financial planner” indicated higher levels of financial satisfaction.
The findings from the exploratory interview also supported this rela-
tionship. However, Dowling et al. (2009) in their study saw no associ-
ation between financial counseling attitude and financial satisfaction.
During the qualitative interviews, it was noted that respondents
expressed that trust in the advisor was important, and this added to
the individual's confidence levels. If financial planners are biased in
TABLE 8 Reliance on experts bias and financial satisfaction (based on investment experience)
Investment Sample Independent
experience category size (n) variable Dependent variable
Between 2 and 5 years 108 Reliance on experts bias Financial satisfaction
Greater than 5 years 174 Reliance on experts bias Financial satisfaction
SAHI
their advice and are motivated with the considerations of sales and
not genuine in their dealings with the customers, this would get in
the way of building confidence in the mindset of the customers.
It is essential to note here that financial advice is highly complex
and intangible activity and requires customization and that the nature
of financial advice is such that it may take months or even years
“before the true value of the investment advice can be assessed”
(Sharma & Patterson, 1999; pp. 152 and 153). Further, professional
financial advisory services are an example of medium‐to‐high contract
category of services (Lovelock, 1983) where a “high degree of interac-
tion and interpersonal communication between client and service
professional is essential for successful service delivery” (Sharma &
Patterson, 1999; p. 152).
According to Sharma and Patterson (1999), “Trust plays a critical
role in financial planning services owing to the inherent credence prop-
erties and complex nature of the service which makes it difficult for
many clients to determine their own investment options, and even
later it is problematic whether they are able to confidently assess
whether their financial returns were maximised.” (p. 156). Hence, it is
essential that the relationship of the client with the financial advisor
is enduring over considerable time to enable trust to develop (Cox,
2007; Sharma & Patterson, 1999).
Though this hypothesis was rejected overall, it was decided to
check whether the relationship between relying on expert and financial
satisfaction is found to be significant if the sample is controlled for the
number of years of investment experience. It was proposed that the
more investment experience, the more chance of trust developing,
leading to a positive and significant relationship between reliance on
expert bias and financial satisfaction.
Regression was conducted to check for the positive and significant
relationship between reliance on expert bias and financial satisfaction
for different investment experience categories. The results (Table 8),
showed that, although for individuals with 2 to 5 years of investment
experience, reliance on expert was significantly but negatively associ-
ated with financial satisfaction (p < .01), implying that the more people
in this category relied on the experts, less financial satisfaction they
experienced; but for investors with more than 5 years of investment
experience, reliance on expert bias was positively and significantly
associated with financial satisfaction (p < .10), which supports the fact
that trust which would develop over time, would have a role to play in
making investors rely more on experts and experience more financial
satisfaction.
The above results show that time plays a crucial role in enabling
those who rely on financial experts to build the trust and feel satisfied
with their financial performance and financial planning.
Hence, though the overall hypothesis that reliance on expert bias
has positive and significant association with financial satisfaction is
rejected but as the above analysis shows that as the investment
Significance Standardized
F value (p value) Adjusted R2 beta
7.590 .007 0.058 −0.257
2.803 .096 0.010 0.126
SAHI 17

experience increases this relationship holds true. This result would 10.4 | Budgeting tendency and financial satisfaction
require further exploration.
The hypothesis that budgeting tendency is positively and significantly
related to financial satisfaction is accepted. This implies that the
10.3 | Categorisation tendency and financial tendency to plan for saving and investments is positively and signifi-
satisfaction cantly related to financial satisfaction.
Although economists would say that money is fungible implying
The hypothesis that categorisation tendency is positively and signifi-
that one unit of money can be substituted for another, studies have
cantly related to financial satisfaction is rejected. This implies that
shown that people make budgets on the basis of either the saving
the tendency to categorize money into groups or categories on the
and investment motivations or the spending motivations and treat
basis of use, and source of funds is not associated with the individual's
their money as nonfungible (Shefrin & Thaler, 1988; Thaler, 1999).
satisfaction with their financial status. However, previous studies have
Hence, budgeting violates the principle of fungiblity, which
shown that categorisation, which is a mental accounting phenomenon,
neoclassicical theory postulates, and hence, is considered as a devia-
wherein people form segments, which help them to differentiate the
tion from the standard theory. Although Xiao et al. (2006) found no
money, based on its use and source, thereby enabling quick and easy
significant relationship between following a budget or a spending plan
decisions (Rosch, 1978; Shefrin & Thaler, 1988; Thaler, 1999).
with the financial satisfaction, Titus et al. (1989b) found that people
Categorisation also helps people to be able to control and be aware
who make budgets have greater financial satisfaction levels. This
of, in advance, which accounts can be exhausted, without impacting
positive relationship between financial management practices that
their overall organization of money and thus lead to satisfaction
included budgeting was also found by studies conducted by Grable
(Mogilner et al., 2008; Pompian, 2006). Although categorization ten-
and Joo (2004), Dowling et al. (2009), and Yin‐Fah, Masud, Hamid,
dency may not have a direct relationship with financial satisfaction,
and Paim (2010). This research supports this view with specific focus
further exploration was done to better understand this relationship.
on budgeting tendency and financial satisfaction.
Having separate current accounts, a categorization aspect of mental
Budgeting is a process of setting aside some income for fulfilling
accounting has been shown to be influenced by an individual's educa-
future goals. An individual's goals and objective over one's financial
tion (Antonides, 2008). Previous studies have shown that higher edu-
life cycle are important considerations when the individual under-
cation would not only enable people to be more planned in their
takes investment‐planning activities (Bajtelsmit & Rastelli, 2008).
financial decisions but also facilitate gathering of relevant information
Further, in the context of the Indian culture, Jain and Joy (1997)
that would enable better financial practices (Cunningham, 2001).
elabourated that acquisition of wealth is essential for the purpose of
Research studies in the domain of financial satisfaction have seen that
natural progression of a human being and hence, the saving need
education has an indirect impact on financial satisfaction, wherein the
determines the consumption requirements. According to Karmakar
education impacts the financial attitudes and behaviours of the individ-
and Ghosh (2009), the Indian society “believes in saving for a rainy
ual, which would impact the financial satisfaction levels (Joo & Grable,
day—a belief which has helped the Indian consumer emerge as one
2004). Hence, it was decided to explore the results further to measure
of the ‘most confident’ in today's scenario of economic turmoil.” (p.56).
the influence of education in this regard. Professional education
Hence, budgeting is a process, which enables an individual to
imparts people with various skills as compared with other levels of
make financial plans and accordingly set aside amounts of money at
education. These skills help people to make better decisions in general.
periodic intervals so as to enable the fulfillment of future goals. This
It was proposed here to see whether the people who are professionally
tendency has been found to give the investor a sense of satisfaction
qualified are exhibiting the positive impact of categorization tendency
with their financial status, as the individual would be able to see how
on their financial satisfaction levels.
the various investment decisions would help in the achievement of
A simple regression analysis was conducted to check whether
the specific goals.
being professionally qualified has any impact on the relationship
between these variables. Only those who had a professional education
were chosen from the sample. The sample size of this group of inves-
tors was 218. The results (Table 9), showed that for individuals who 10.5 | Adaptive tendency and financial satisfaction
had “professional education,” categorization tendency had a significant
and a positive association with financial satisfaction. The financial markets are changing so fast and this requires people to
Hence, though overall categorization tendency may not be signif- keep abreast with not just the changes but also adapt their portfolio
icantly associated with financial satisfaction, however, for profession- to incorporate these changes. This has not been found to contribute
ally qualified people, this tendency does have a positive and to an individual's financial satisfaction levels.
significant association with financial satisfaction. This result would Also, though adaptive tendency may not have a direct effect on
require further exploration. the individual's financial satisfaction but may be mediated by the time

TABLE 9 Categorization tendency and financial satisfaction (for professionally qualified education profiles)
Independent
variable Dependent variable Sample size (n) F value Significance (p value) Adjusted R2 Standardized beta

Categorization tendency Financial satisfaction 218 6.469 .012 0.024 .170

18
available to the individual to change his or her portfolio. This would
require further exploration.
10.6 | Socially responsible investing bias and
financial satisfaction
The hypothesis that socially responsible investing bias is positively and
significantly related to financial satisfaction is rejected. Previous stud-
ies have shown that investors do base their investment decisions on
criteria of social responsibility (Keller & Siegrist, 2006a, 2006b;
Nilsson, 2008, 2009; Williams, 2007). Webley et al. (2001) stated that
investors have started taking into account the moral dimension in
financial investing and seek investments that are “right” as well as prof-
itable. The moral and ethical dimensions play an important role in
investment decisions and people make investments in the companies,
which they feel are socially responsible, even if the predicted gains
are lower than others (Keller & Siegrist, 2006b; Webley et al., 2001;
Williams, 2007). This was also observed in the exploratory phase of
the research.
However, the results of the study show that socially responsible
investing bias is not significantly related to financial satisfaction. Stud-
ies have indicated that considerations for socially responsible investing
take into account the financial criteria also and not solely ethical and
moral dimensions (Fung, Law, & Yau, 2010; Nilsson, 2008; Nilsson,
2009; Pasewark & Riley, 2010). Rosen et al. (1991) stated that though
investors do value social dimensions of investment but not at the cost
of financial returns. Hence, giving priority to social issues when making
investment decisions, without giving due consideration to the financial
returns is not possible for every segment of the investor, particularly
the working class families (Macdonald, 2008). It is pertinent to note
here that the majority of the respondents in this study belong to the
service occupation segment of the population who could be more
focused on getting positive and certain financial returns.
When an investor invests keeping the social responsibility motive
in mind, they are willing to forgo some amount of financial returns.
Studies have shown that socially responsible funds have given lower
returns than market (Jones, Van der Laan, Frost, & Loftus, 2008). This
is so, because the companies that have social motives behind their
investments, which may not immediately reflect in the bottom line,
would tend to have lower cost of capital than companies that make
investments that are motivated with increasing their bottom line.4
Further, McGuire, Sundgren, and Schneeweis (1988) state that inves-
tors may consider those firms that are less socially responsible firms
to be riskier investments. They further add that “Lack of social respon-
sibility may expose a firm to significant additional risk from lawsuits
and fines and may limit its strategic options:” (p. 868). Hence, socially
responsible firms would be less risky than those who are less socially
responsible. When we consider the risk return trade‐off, we know that
more risk means more chance of returns. Thus, socially responsible
firms would give lower returns. Yet investors who are more concerned
about social responsibility invest more in those alternatives (Barreda‐
Tarrazona, Matallín‐Sáez, & Balaguer‐Franch, 2011), inspite of the
4
http://www.obliviousinvestor.com/socially‐responsible‐investing‐expect‐
lower‐returns/
SAHI
lower returns. Hence, only those investors who are not motivated by
the need to achieve higher returns, that is, those who are not high
on risk‐seeking behavior, would have preferences on the basis of social
responsibility.
The speculative risk scores in this study measure the risk seeking
behavior of the investors. Given the above background, we can say
that those investors who desire more returns would have high specu-
lative risk scores, and they would thus not be motivated with the
socially responsible investments. However, if the investors are not
motivated with these higher returns, they could experience investing
in socially responsible investments giving them a sense of financial sat-
isfaction, because social investments take a longer time to give returns,
even though low, but which are more sustainable. Hence, if the inves-
tor has a long‐term perspective and is looking at stable returns, then
socially responsible investments would suit his or her objectives.
Hence, the question that was worth exploring further was that for
those respondents who had low speculative risk scores, does socially
responsible investing bias associated positively with their financial
satisfaction?
The respondents who had speculative risk scores less than 3,
thereby meaning that these respondents were not risk seekers who
were motivated with higher financial returns, were selected for the
purpose of conducting the analysis. Regression results (Table 10),
showed that for this segment of respondents, SRI Bias had a positive
and significant association (p < .10) with financial satisfaction.
Further, education could also impact the decision to be inclined to
keep into consideration the social dimensions of investing. Higher and
professional education makes people aware of the moral and ethical
concerns that society faces and the role of organization in ensuring
corporate social responsibility. Regression results showed that for pro-
fessionally qualified respondents who were less inclined towards spec-
ulative aspect of financial risk taking (Score < 3), socially responsible
investing bias had a positive and significant association with financial
satisfaction (Table 11).
The above discussion implies that though socially responsible
investing bias may not be directly associated with financial satisfaction,
however, for respondents who have less inclination towards the spec-
ulative risk side would invest taking into consideration the moral and
ethical dimension of investments, which has a positive linkage with
financial satisfaction. Pasewark and Riley (2010) in their study found
that people who valued that the societal impact of investments should
be positive were more likely to select a bond issued by a nontobacco
company, even when the rate of return on such investment was lower
than that of a tobacco company. This supports the findings of our
study and further reinstates that socially oriented investors are willing
to compromise on lower sustainable returns. Further, among such
respondents, those who are professionally educated have greater cor-
relation between SRI bias and financial satisfaction. However, further
research in this area would be needed to understand the phenomenon
more deeply.
10.7 | Spouse effect and financial satisfaction
The hypothesis that spouse effect is positively and significantly related
to financial satisfaction is rejected. This implies that an individual's
SAHI 19

TABLE 10 Socially responsible investing bias and financial satisfaction (speculative risk scores < 3)
Independent
variable Dependent variable Sample size (n) F value Significance (p value) Adjusted R2 Standardized beta

Socially responsible investing bias Financial satisfaction 165 3.556 .061 0.015 .146

TABLE 11 Socially responsible investing bias and financial satisfaction (for professionally qualified respondents with speculative risk scores < 3)

Independent
variable Dependent variable Sample size (n) F value Significance (p value) Adjusted R2 Standardized beta

Socially responsible investing bias Financial satisfaction 108 8.559 .004 0.065 .272

tendency to rely on their spouse with regard to financial investment
decisions is not significantly associated with their financial satisfaction
levels. Previous studies have shown that married individuals do not
make their own financial decisions and these are either influenced by
the spouse or are jointly decided (Lyons et al., 2008; Sung & Hanna,
1998). Hence, spouse effect is inevitable in case of financial invest-
ment decisions. Further, the exploratory interviews revealed that both
men and women felt that taking joint decisions on financial matters
helps in better financial planning and management. However, the
results of this study indicate that the relationship between these two
variables is not significant. In order to explore the results further, it
was decided to conduct a one‐way Analysis of Variance (ANOVA)
between gender and spouse effect (for married respondents,
n = 270), to understand whether the spouse effect tendency is differ-
ent between men and women. The results (Table 12) indicated that
there is a significant difference between the mean scores of spouse
effect between men and women.
The results of the independent sample t test (Table 13), also
showed that men and women differ in their tendency towards spouse
effect and that women tend more towards this bias than men.
In order to find out whether in each of these categories, any
significant relationship emerges between spouse effect and financial
satisfaction, it was decided to conduct simple regression analysis.
The results showed that for both men and women, spouse effect
shows no significant relationship with financial satisfaction. Hence,
the results showed that though women tend more towards involving,
consulting and getting influenced by their spouse with regard to
investment decisions than men, but that does not have any significant
relationship with either men or women's financial satisfaction levels.
Literature pertaining to gender and financial risk taking considers
men as being more risk taking than women and that women
are by nature conservative investors than their male counterparts
(Fehr‐Duda, Gennaro, & Schubert, 2006; Roszkowski & Grable,
2010). The findings of the earlier studies support the results of this
study and as shown in the Table 14, which indicates that married
men and women significantly differ in their speculative risk scores
and that the mean score of speculative risk is higher for men than
women.
Investment risk attitude influences the choice of investments
(Hallahan, Faff, & McKenzie, 2004; Kuhnen & Chiao, 2009). Further,
according to Papp, Cummings, and Goeke‐Morey (2009), “compared
to nonmoney issues, marital conflicts about money were more perva-
sive, problematic, and recurrent, and remained unresolved, despite
including more attempts at problem solving.” (p. 91). .Hence, this
difference in the investment risk taking attitudes may lead men and
women to prefer different investment options and take different levels
of risk and in case of such difference; the choices preferred by men and
women may not be the same; hence, though the spouse effect may
hold true, it does not necessarily result in financial satisfaction of the
individual.

TABLE 12 ANOVA results for gender and spouse effect

Independent variable Dependent variable F value Significance (p value)

Gender Spouse effect 14.147 .000

TABLE 13 Independent sample t‐test results for gender and spouse effect

Dependent (test) variable Grouping variable N Mean Std. deviation t df Sig. (2‐tailed)

Spouse effect Men 222 3.2590 1.00307 −3.761 268 .000

Women 48 3.8542 0.95069

TABLE 14 Independent sample t‐test results for gender and speculative risk

Dependent (test) variable Grouping variable N Mean Std. deviation t df Sig. (2‐tailed)

Speculative risk Men 220 3.0598 0.75823 4.051 265 .000

Women 47 2.5851 0.57196
20
10.8 | Self‐control and financial satisfaction
The hypothesis testing results showed that self‐control bias and financial
satisfaction is positively and significantly related. This implies that the
more the investors (who have this tendency to postpone their present
consumption for the sake of saving for the future) exercise self‐control,
they would tend to feel more financially satisfied. The behavioural
life‐cycle theory of Shefrin and Thaler (1988) emphasized that self‐control
and mental accounting determine the behaviour of the individuals.
Human beings have been found to lack self‐control, and this has
contributed to their huge debts and credit card outstanding amounts.
Satisfaction of the present consumption needs is always considered
as a lucrative option rather than postponing the same. In the endeav-
our to exercise self‐control, an internal conflict takes place within the
individual, which involves the exertion of effort in the form of will-
power (Shefrin & Thaler, 1988; Thaler & Shefrin, 1981). In order to
make this effort less painful, people resort to dividing their incomes
into three broad categories, namely, current income, current assets,
and future income and thereby imposing constraints on their uncon-
trolled desires. This process not only reduces the feasible consumption
choices for the doer and thereby reduces the costs associated with
exerting willpower but also increases the utility (Shefrin & Thaler,
1988; Thaler, 1999). Cummins and Nistico (2002) found that need
for control is positively linked to life satisfaction.
In the context of financial satisfaction, although Xiao et al. (2006)
found people's sacrificing of their current spending by participating in
flexible spending plans is negatively associated with their financial sat-
isfaction levels, other studies have found that financial behaviours that
included saving and cash management practices have a positive rela-
tionship with financial satisfaction (Dowling et al., 2009; Grable &
Joo, 2004; Parrotta & Johnson, 1998).
Thus, domain‐specific self‐control bias has a positive and
significant association with financial satisfaction. Self‐control bias as
a psychological tendency has a positive and significant association with
financial satisfaction as people who are able to exert control of their
impulses feel that they have power over themselves, and this way,
they can undertake greater and more efficient financial planning
activities that would help in the fulfillment of their goals.
11 | CO NCLUSIO N
In this study, attempt was made to understand the relationship
between individual investor biases and financial satisfaction and to
develop measures for the identified individual investors' biases.
In the endeavour to achieve the objectives of the research, a
mixed method approach to study the phenomenon was adopted. On
the basis of exploratory interviews with individual investors and finan-
cial experts, the manifestation of the investors biases was explored.
The insights from the interviews and literature review formed the basis
for the development of measurement constructs for this study. The
investor biases constructs were developed and put through a thorough
process of construct validity and reliability checks, before the adminis-
tration of the final survey. The final study was conducted on a sample
of 377 respondents and hypotheses were tested. Financial satisfaction
SAHI
and financial risk‐taking attitude constructs were modified and
adapted for the study.
11.1 | Limitations of the study
It is important to state here that this study has been restricted to those
who were willing to disclose their financial beliefs and preferences.
The sampling method used in the study was judgment and snowball
sampling, which is a nonprobability sampling technique. Although it
serves the objectives of the study, the method has its own limitations.
Despite these limitations, the study has much use for research
practitioners and financial advisory service providers.
11.2 | Contributions of the study
Traditional finance has considered biases, as a flaw in human judgment
and these prevent people from making decisions that maximise their
well‐being. However, this study supports the view that investor biases
are not necessarily flaws that need to be corrected but are an inherent
part of the individual's nature and form an important aspect of their
decision‐making process, and thus, these need to be understood better.
The study contributes to the theory of behavioural finance by
enhancing the understanding of the relationship of the individual
investors' biases with the investors' financial satisfaction levels. Thus,
it identifies the investor biases, as important in determining financial
satisfaction that further contributes to the understanding of financial
satisfaction. More specifically, the study found that
• Overconfidence bias, self‐control bias, and budgeting tendency
have a positive and significant association with financial
satisfaction;
• For professionally educated individuals, categorization tendency
has a positive and significant association with financial
satisfaction;
• Reliance on expert bias has a positive and significant association
with financial satisfaction for those investors with more than
5 years of investment experience and a negative but significant
relationship for those investors with 2–5 years of investment
experience, thereby indicating that time plays a crucial role in the
ability of investors to build trust with their financial advisors.
• For people who had low speculative risk scores and were
professionally qualified, socially responsible investing bias had a
positive and significant association with financial satisfaction.
The findings imply that an individual investor, when making finan-
cial investments, is prone to certain natural tendencies that may seem
as errors when compared to the decisions that should be made by a
Homo economicus, but these tendencies help the individual to make
the most appropriate decision that suits the situation, given the
uncertainity and the quantum of information that forms the basis for
financial decisions. Hence, these tendencies, which have developed
over time in the mind of the individual, help the individual to make
sense of his or her decisions and help to achieve the satisficing
behaviour, which may not seem appropriate from the “rational” man
or woman's perspective.
SAHI
The investment advisory process should therefore try and under-
stand the biases that the investors have and suggest financial products
and instruments that are found suitable on the basis of these individual
biases (Sahi et al., 2012). This study provides the measurement scales
for financial providers to use for identifying the biases that are preva-
lent in the investor's psychology.
11.3 | Future research directions
This study also paves the way for various possibilities for further
research in the domain of behavioural finance. These include the
following:
1. There is a scope to explore other investor biases and their
association with financial satisfaction.
2. Different scales have been developed as a part of this research.
These scales could be validated in other settings.
3. Developing a composite measure for investor biases
4. Theoretical modeling of the investor biases, financial satisfac-
tion, and actual performance
5. Future studies that are conducted across the other socioeco-
nomic segments would help to understand whether the findings
from this study are stable across the other segments also.
6. Also, longitudinal study can be conducted to check if the inves-
tor biases and financial satisfaction levels remain stable or
change over the period.
7. A study can be conducted to check whether socially responsible
investing bias is positively associated with financial satisfaction,
for investors with low speculative risk scores and the impact of
education on the strength of this relationship.
8. Though the tendency to rely on experts is prevalent in case of
financial investment decisions, it is important to understand
how trust acts as a moderator in enabling those relying on finan-
cial experts to have more financial satisfaction. Further, with
regard to the tendency to rely on experts, it could also be that
those with more investment experience realise that they need
some help from experts (especially if they have had some bad
investments already in the past). This would too enable them
to experience a sense of financial satisfaction as they may now
feel that their investments would now be in the safe hands of
a professional. Hence, actual financial performance may trigger
this tendency further.
9. A study can be conducted to check on the mediation effect of
time available to the individual to change his or her portfolio
on the relationship between adaptive tendency and financial
satisfaction.
10. Future research could also look at behavioural experiments,
neuro‐economic testing, and analysis of actual performance of
investors
11. Understating the investors' awareness level of biases that they
have and what they feel about the same, that is, are they useful
to them or not?
21
Hence, there are ample possibilities for future research in this
area, and these studies will help to understand the investor's psychol-
ogy and decision‐making behaviour.
ACKNOWLEDGEMENTS
I would like to thank Management Development Institute, Gurgaon
where I pursued my research work and my thesis committee members:
Prof. Nand Dhameja, Prof. Ashok Pratap Arora, and Prof. Satish Kumar
Kalra for their support in carrying out this study.
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AUTHOR BIOGRAPHY
Shalini Kalra Sahi is an assistant professor in the area of Finance at
Management Development Institute, Gurgaon, India. She received
her Masters in Business Economics (MBE) and M.Phil. (Business
25
Economics), both from University of Delhi, New Delhi, India. She is
also a Fellow (FPM‐doctoral programme) of Management Devel-
opment Institute (MDI), Gurgaon, India. She has around 8 years
of teaching experience and has published a number of articles in
the area of Behavioural Finance and Investor Psychology.
How to cite this article: Sahi SK. Psychological biases of indi-
vidual investors and financial satisfaction. J Consumer Behav.
2017. https://doi.org/10.1002/cb.1644