Rationality, Intuition, and Behavioral Biases in Investment Decisions: Bridging Classical Finance and Behavioral Finance with Evidence from Morocco

Abstract

ABSTRACT:

Financial decision-making has conventionally been conceptualized within the classical framework of rational agents functioning in efficient markets. This theoretical construct, represented by Homo economicus, posits that individuals possess complete information, demonstrate consistent behavior, and are solely dedicated to optimizing expected utility. Nevertheless, enduring market anomalies such as bubbles, excessive volatility, and momentum phenomena have called into question this rationalist perspective. These discrepancies underscore that investors frequently operate under the influence of psychological and social determinants rather than pure rationality. Behavioral finance has emerged as a discipline to bridge the existing gaps by synthesizing perspectives from psychology and sociology. It elucidates how cognitive biases, emotional responses, and heuristics such as overconfidence, loss aversion, and herding behavior consistently influence investment decisions. Prospect Theory, for example, illustrates that investors assess gains and losses asymmetrically, frequently resulting in suboptimal decision-making. Contemporary frameworks, such as Andrew Lo’s Adaptive Market Hypothesis, endeavor to reconcile classical and behavioral paradigms by conceptualizing markets as evolutionary systems in which rationality evolves in response to shifting environmental conditions. Evidence from emerging economies, such as Morocco, substantiates these observations. Research indicates that investors in Morocco demonstrate analogous behavioral characteristics, particularly overconfidence, herding behavior, and loss aversion that markedly affect their investment results. Integrating classical finance theories with behavioral finance principles facilitates a more nuanced comprehension of financial behavior. Acknowledging both rational analytical frameworks and psychological inclinations enhances the development of superior financial models, more effective policy formulation, and refined decision-making strategies for both investors and managers.

KEY WORDS: Rationality, Behavioral Finance, Intuition, Cognitive Biases, Efficient Market Hypothesis, Prospect Theory, Investment Decisions, Morocco.