Taking charge of your life: locus of control, self-efficacy and saving behavior

Abstract

Individuals’ saving behaviors have always been an important subject for researchers and scholars as it is a key determinant of National Savings. According to theories like social cognitive theory and life-cycle theory, psychological factors largely influence one’s saving and financial behavior. Along with this, the theories of Behavioral Finance i.e. prospect theory and heuristics theory introduces various behavioral biases that individuals are prone to in making different decisions and depicting behaviors. Around the concepts of psychological theories and behavioral finance theories, this study seeks to find the relationship of two main psychological factors i.e. locus of control and self-efficacy with salaried individuals’ saving behaviors and the mediating effect of behavioral biases (overconfidence bias, herding behavior and cognitive dissonance bias) on this relationship. A structured questionnaire is used for the collection of primary data which was distributed to the salaried class individuals of both government and private sector. With 327 of the total responses analysis is conducted through structural equation modeling (SEM). Analysis shows that the people’s locus of control and self-efficacy has an effect on saving behaviors and overconfidence bias and herding behavior have a mediating effect on this relationship whereas there is no mediating effect of cognitive dissonance bias found on this relationship.