The impact of behavioral biases on financial satisfaction: the mediating role of investment decisions

Financial Satisfaction (FIS) has garnered significant attention from academicians, financial practitioners, and policymakers due to its contribution to enhancing overall well-being. Prior studies have examined the influence of a few behavioral biases on FIS directly, but they do not integrate relevant mediators that can define these relationships. Hence, the study intends to investigate the influence of overconfidence bias (OCB), mental accounting (MA), loss aversion (LA), and self-control bias (SCB) on FIS, with investment decision-making (IDM) as a mediator. The primary data is gathered from 492 active investors in the northern Indian region using snowball sampling. The model’s reliability, validity, and fitness are measured using composite reliability, average variance extracted, Heterotrait-monotrait ratio, and SRMR (Standardized Root Mean Square Residual) using partial least square structural equation modeling. Moreover, common method bias is addressed using Herman’s single-factor test. The study’s results report that SCB, OCB, MA, and LA have negative and significant relationships with investors’ FIS in their respective orders. These biases are detrimental due to their distortionary effects on behavior related to saving, investing, spending, and risk management which negatively influence FIS. Additionally, the findings reveal that IDM establishes complementary partial mediation, which means that behavioral biases result in sub-optimal decisions that impede IDM, ultimately influencing FIS negatively. Ergo, the study makes a substantial contribution to the behavioral finance literature, suggesting that financial advisors and policymakers should raise awareness regarding realistic returns and incorporate behavioral finance into financial literacy programs.