The Influence of Behavioral Biases on Portfolio Management Decisions: Deviations from the Efficient Frontier of Modern Portfolio Theory

This article crucially highlights the significance of behavioral finance in understanding persistent discrepancies between the theoretical efficiency frontier and actual observed returns in financial markets. By delving deeply into the influence of human behaviors, often impulsive and emotionally driven, on asset pricing, it explores the complex mechanisms underlying these disparities. The substantial differences between theoretical forecasts and observed outcomes are explained by the intricacies of cognitive biases, emotional reactions, and collective behaviors of investors, all facets explored by behavioral finance. Understanding these factors becomes imperative to shed light on market movements beyond the confines of traditional models. Providing a comprehensive analytical framework that integrates human psychology, behavioral finance elucidates the imbalances between efficiency expectations and actual returns. This study represents a deep dive into the evolution of portfolio management, from traditional theory to the emergence of a behavioral perspective. It explores the history and transformation of portfolio management models, from the foundations of expected utility theory to recent advances in behavioral finance. Furthermore, based on a sample of 93 Moroccan investors, this article offers a comprehensive view of the practical implications of behavioral finance in the context of asset management. Considering the future directions of research, it anticipates a continually expanding field, with promising ramifications for a more informed and adaptive financial practice.