Investment Psychology in Developing Economies: Albania’s Case and the Money Laundering Dynamic

Bozheku E¹*, Profkola K² and Cucllari I²

¹Dean of Faculty of Law, University College “Qiriazi”, Albania ²Department of Civil and Commercial Law, University College “Qiriazi”, Albania Keywords: Investment Psychology; Homo Oeconomicus; Corruption; Money Laundering

Introduction

Over the years, economic theories have established the principle that humans are rational agents who, when making investment choices, act based on reasoning aimed at maximizing their personal utility and enhancing their well- being. This economic principle has evolved into the concept of Homo Oeconomicus. The term was first introduced by economist John Kells Ingram [1], who emphasized the individual’s ability to reason when making investment decisions based on rational, deliberate, and information- driven thought.

In fact, following the Second World War especially during the 1950s and 1960s economists like Herbert Simon [2], Maurice Allais [3], and others laid the initial analytical groundwork challenging the concept of Homo Oeconomicus by pointing out its theoretical limitations in relation to real human cognitive processes. Even earlier, philosopher- jurist-economists such as Vilfredo Pareto, John Stuart Mill, David Hume, and Jeremy Bentham had already studied how political, intellectual, and psychological factors influence human decision-making in economic and investment contexts.

Notably, the author who later became a pioneer in reshaping economic thought through prospect theory is Daniel Kahneman [4]. This branch of behavioral economics studies human psychology and the behavior patterns individuals show when making investment decisions. It explores the human element in economic choices, which are often influenced by fleeting impulses, fear, overconfidence, poorly processed information, or even the thrill of investing without enough consideration of the possible outcomes.

Furthermore, unlike the neoclassical model of Homo Oeconomicus, this theory concentrates on examining individual and social behavior patterns within economic systems, such as financial markets. These behaviors are often characterized by emotional fluctuations that directly impact both individual investors and investment firms. The theory investigates various human emotional factors such. compassionate, pride, greed, arrogance, overconfidence, and excessive optimism which, in different forms, influence financial decisions and produce broader effects throughout the economic and financial system. These emotional types are frequently irrational and lead to the development of internalized investment beliefs that lack clear vision and long-term planning. This behavior sharply contrasts with the principles of classical finance theory, which relies on rational and analytical decision-making by individuals and the system as a whole.

Thus, the role of behavioral finance is to understand, analyze, and identify the behavioral patterns of both economic-financial systems and individual agents.

In the investment world too, the psychological factor plays a key role in shaping not only the types of investments made but also the expected benefits whether related to personal gain or the larger impact these investments have on the economy.

Likewise, external psychological factors referred to as cognitive biases can lead to errors with potentially devastating consequences for both individual investors and the broader financial markets.

Euristica

Consequently, financial operators and individuals often engage in an unconscious manner in a decision-making process known as heuristics [5]. This method, based on quick, intuitive thinking without thorough analysis of all available information, often results in cognitive shortcuts that, through excessive simplification, cause logical errors and faulty judgments. In investment psychology, three main forms of heuristics are identified [6]: a) Representativeness heuristic, which is based on forming judgments according to stereotypes and familiar patterns or scenarios.

b) Availability heuristic, which is based on retrieving information to make decisions. This heuristic reflects a tendency to estimate probabilities based on how easily certain events or situations come to mind giving higher weight to those that are simpler to understand and easier to remember.

c) Anchoring heuristic describes how individuals formulate predictions and make judgments based on an initial reference point, which then serves to adjust subsequent analytical reasoning. This anchor is often linked to previously received information or to a general estimate related to the desired element.

The heuristic forms outlined above, commonly known as mental shortcuts, are also considered instrumental in generating cognitive biases that is, systematic errors linked to superficial analysis, emotional influences, and stereotyped environmental or familiar factors.

As previously mentioned, cognitive biases are skewed perceptions of facts and situations, leading to subjective viewpoints that distort reality. These biases stem from personal experiences, internalized concepts, and environmental stereotypes, all of which are disconnected from logic or any objective assessment of the information.

By relying on heuristics as a primary decision-making mechanism, individuals often encounter cognitive biases that result in outcomes misaligned with what was originally envisioned or intended to be achieved in practice.

Another form of cognitive bias is the so-called home bias, which is based on heuristically driven thoughts that reinforce comfort with one’s own choices and prevent challenging one’s psychological comfort zone. This behavior is closely linked to personal experiences, blind trust, and the emotional states individuals experience in relation to such decisions.

This type of cognitive bias (home bias) usually appears mainly during times of economic uncertainty or in weak economies marked by significant social disparities.

Materials

To provide a more straightforward overview of the main perspectives in behavioral finance, the most prominent theories are summarized below.

Thaler [7] in The End of Behavioral Finance argues that behavioral finance, once on the fringes, has become a key part of modern economic thought. Challenging the Efficient Market Hypothesis (EMH), which assumes rational investors and efficient pricing, Thaler highlights ongoing market anomalies such as bubbles, overreactions, and excessive trading that traditional models cannot explain. Behavioral finance has advanced through strong empirical research, becoming a vital perspective for understanding financial markets.

Barberis and Thaler [8] further critique EMH by highlighting common irrational behaviors, including investors trading too frequently, selling winners too early, and holding losers too long patterns that conflict with rational maximization. These behaviors indicate emotional and psychological influences outweigh logic.

Shiller [9] investigates the psychological and social forces driving market booms and busts. He demonstrates that stock prices often diverge from fundamental values due to emotions such as fear and greed, herding behavior, and social contagion. The concept of “irrational exuberance” illustrates how collective sentiment inflates prices beyond rational expectations.

Waweru, et al. [10] note that investor behavior is greatly influenced by peer pressure, leading to herd mentality and regret. Baker and Wurgler [11] describe sentiment as a wide- ranging emotional state either optimism or fear that affects market trends regardless of fundamentals. High sentiment levels push asset prices up; low sentiment levels limit capital flow and growth.

Ritter [12] explains that cognitive biases like heuristics and framing illusions systematically distort investor judgment. Despite advances, behavioral finance has yet to establish a unified predictive model, illustrating its complexity.

Lo [13] addresses this gap with the Adaptive Markets Hypothesis (AMH), integrating principles of evolution and learning. Unlike EMH, AMH suggests that market efficiency is dynamic and context-dependent. Investor behavior changes with market conditions, influenced by competition, innovation, and environmental shifts. Under stress or when new participants join, biases emerge, leading to inefficiencies. Over time, however, adaptive behavior restores partial efficiency. AMH posits that no strategy remains optimal indefinitely; market adaptation is key. This theory accounts for sentiment-driven mispricing and return predictability based on evolving investor behavior. Emotions like overconfidence, fear, and representative bias are central to these patterns.

Together, these theories create a comprehensive framework for understanding decision-making in modern financial contexts. They highlight the importance of psychological factors in shaping both short-term market movements and long-term investment patterns. When applied to transitional economies like Albania, they offer essential tools for analyzing the interaction between formal structures and behavioral responses, especially amid systemic uncertainty and institutional weaknesses.

In the following sections, these theoretical insights will be placed within the context of the Albanian economic landscape, emphasizing how behavioral and rational mechanisms together influence investment decisions in environments affected by money laundering, corruption, and informal market dynamics.

Albania’s Case and the Money Laundering Dynamic

This paper places itself within the ongoing academic and policy debate by critically assessing Albania’s economic infrastructure and environment, focusing on key issues like corruption and money laundering. Using behavioral economic analysis, institutional diagnostics, and empirical data, it aims to evaluate the effectiveness of the monetary system, financial behavior, and legal issues related to money laundering, and identify structural risks that exist beneath the formal framework in investment areas.

The Albanian economy exemplifies a typical developing nation transitioning from a centrally planned system to a free-market economy. Since the early 1990s, Albania has implemented a series of structural reforms to open markets, encourage private investment, and enhance competition. However, the behavior of economic agents both investors and consumers demonstrates a blend of classical rationality (utility theory) and psychological, emotional, and cultural influences, making the country more similar to a behavioral financial model (prospect theory).

With the fall of communism, the Albanian economy was restructured to create a free and competitive market. The main reforms after 1991 included privatizing state-owned enterprises, opening to foreign direct investment (FDI), and integrating into international markets. Officially, the system aligns with the neoclassical model of a free market; however, in practice, the behavior of economic agents has shifted it toward a hybrid model where decision-making psychology prevails.

In transitional countries overall, especially in Albania, economic decisions are greatly affected by subjective perceptions such as risk, emotions, social norms, and trust. These factors become even more important because of the instability of institutions and the lasting effects of collective behavioral patterns inherited from the previous economic system.

Investment Decisions

Making smart investment decisions can be difficult. It’s not just about analyzing financial data. Traditional finance theories, such as the Efficient Market Hypothesis [14], as discussed earlier, suggest that investors always act rationally based on available information. However, behavioral finance offers a different perspective. It shows how emotions, mental shortcuts, and biases often influence people’s investment choices [15]. These psychological factors can lead investors, especially in countries like Albania an emerging economy to make decisions that aren’t always logical, resulting in poor financial outcomes. In such environments, investors tend to depend on advice from friends, social pressure, or simple mental rules (heuristics) when choosing where to invest [16]. Since these methods lack proper risk assessment tools, common biases such as loss aversion, herding behavior, and mental accounting become more apparent. For example, loss aversion means people care more about avoiding losses than making gains. As a result, they may hold on to losing investments longer than they should. Herding behavior [17], another common bias, occurs when people tend to follow others instead of thinking independently, often driven by the fear of missing out or the desire to fit in socially. This can lead to bubbles and substantial financial losses. Additionally, how an investment is presented can greatly influence how people perceive the risk. The same opportunity can appear either safe or risky depending on how it is displayed. Understanding how people perceive risk is crucial in financial settings because they often rely on limited or secondhand information such as stories, personal experiences, or word of mouth to assess danger. This can cause them to underestimate or overestimate risks [18], leading to poor decisions [19].

The Money Laundering Dynamic in Albania

Albania operates within a multidimensional, complex economic and institutional landscape where money laundering (ML), corruption, and structural weaknesses affect not only macroeconomic stability but also consumer and investor perceptions.

According to international monitoring agencies for 2025, Albania remains highly vulnerable to money laundering, with illegal funds primarily passing through sectors like real estate, construction, cash-based businesses, and trade- related financial activities [GI TOC 2025].

Based on specialized reports addressing money laundering issues, Albania is identified as a jurisdiction where illicit funds are funneled through the domestic economy to be integrated and laundered. Key sectors impacted include construction, real estate, cash-heavy businesses, money transfer channels, and complex corporate structures [Agnesa].

This also includes using commercial companies as front organizations to hide illegal activities, issuing fake invoices, and conducting trade-based operations meant to disguise the origin of funds. These practices cause significant economic instability by manipulating prices and encouraging unfair competition.

The two most common methods of money laundering in Albania are centred around the real estate sector especially through property overpricing and the misuse of the financial system by issuing large loans that are later repaid with illicit funds. These practices establish Albania as a “privileged” destination for systemic money laundering, where the phenomenon is not just sporadic but deeply embedded and integrated into the operational structure of key markets impacting both consumers and investors.

Albania is a country with high exposure to money laundering, as evidenced by the wide range of sectors infiltrated by this criminal activity [26]. In addition to the areas previously mentioned, money laundering has extended into services provided by non- profit organizations, notaries, legal professionals, certified accountants, public procurement procedures (particularly for infrastructure projects), car rental services, and small- scale commercial activities such as gold trading shops.

The origin of money laundering comes from criminal activities such as tax evasion, corruption, arms and drug trafficking, and fraudulent schemes. From the perspectives of both Prospect Theory and Utility Theory, these activities serve as major obstacles to investment because they increase perceived risks, undermine trust in institutions, and reduce expected utility in the Albanian economy.

Despite demonstrating more coordinated and institutionalized efforts by prosecutorial bodies during 2024, statistical data reveal that the amount of illicit funds being laundered within Albania’s economy continues to raise serious concerns [27]. According to estimates, between 2015 and 2024, Albania’s money laundering activities totaled approximately €1.079 billion [28].

Economically, in 2024 alone, the informal sector is projected to have made up about 20–25% of the national GDP, roughly equivalent to $4–5 billion [29].

In 2024, Albania’s Special Structure Against Corruption and Organized Crime (S.P.A.K.) seized and confiscated assets worth €65.5 million including €28.7 million in provisional seizures and €36.8 million in confirmed confiscations. The recovered assets consisted of real estate, bank deposits, vehicles, cryptocurrencies, and luxury items. Additionally, S.P.A.K. launched investigations against 33 former senior public officials, with 19 (52.9%) officially indicted, and dismantled 16 high-risk criminal organizations, referring 10 for judicial proceedings [27].

These data collectively provide a thorough overview of how money laundering distorts the Albanian economy, influences economic perceptions, and erodes investor confidence in the local business environment.

• According to Prospect Theory, when investors or consumers process economic decisions through an emotional lens, they tend to think: “There is a high circulation of illicit money, widespread presence of criminal groups, and significant insecurity regarding life and property. Corruption is rampant at the highest levels therefore, the risk of losing my capital or becoming involuntarily entangled with criminal networks is very high.” In this context, the dominant frame is that of loss, not gain. A foreign investor, for example, may hesitate to enter the Albanian real estate market because they perceive that property prices and ownership structures are tainted by money laundering and clientelistic ties between organized crime groups and the political elite.
• Meanwhile, domestic consumers see the rise in real estate prices not as a sign of healthy economic growth but as a sign of systemic money laundering.
• This perception breeds fear and a feeling of being excluded from a market that appears distorted and disconnected from real economic fundamentals. Prospect Theory demonstrates that even when sector growth presents clearly high return opportunities people tend to avoid risk. Concerns about losing capital, damaging reputation, and legal issues lead to behaviors focused on avoiding risk and becoming overly sensitive to it. So, individuals shift their attention from potential opportunities to existing risks.
• Continuing the analysis from the perspective of Utility Theory, it is worth noting that a similar conclusion emerges when the situation is evaluated by a rational investor one who considers expected return relative to costs and risk.

Under Utility Theory, the rational investor compares expected returns with systemic risks. In the Albanian context, the widespread issue of money laundering driven by predicate crimes such as drug trafficking, corruption, tax evasion, and fraud creates a high level of institutional uncertainty. Structural flaws in enforcing anti-money laundering laws, loopholes in asset confiscation, and limited capacity to track offshore assets [30] all contribute to a risky environment. As a result, even though high short-term returns are possible, the overall net utility of investment is greatly reduced by the chance of exposure to criminal activity, legal disputes, and asset insecurity. From a Utility Theory perspective, markets dominated by actors using illicit capital create a competitive imbalance that undermines fair business practices. These actors often prioritize money laundering over profitability, accepting minimal margins in exchange for transactional cleansing.

Therefore, legitimate investors face an uneven playing field, marked by distorted pricing, unregulated market forces, and high barriers to entry. In this setting, the expected utility of legal investment drops significantly, as returns no longer match risk, cost, or economic sense.

Methodology

This paper offers a multidisciplinary, comparative, and deductive analysis of the investment climate in Albania by combining classical economic theories with modern behavioral finance approaches. The study uses a mixed- methods research design, integrating qualitative insights into investor and consumer behavior with quantitative statistical data to examine the duality of rational and psychological decision-making processes based on Utility Theory and Prospect Theory, respectively.

Using a comparative approach, the research examines how economic actors in a developing market like Albania operate amid institutional fragility, widespread informality, and high levels of money laundering. Illicit financial flows are seen as key distortive forces that cause inflated real costs (such as compliance, risk premiums, and reputational damage), decrease net utility, and hinder market transparency.

The findings indicate that economic decision-making in Albania is influenced by the interaction between limited rationality and emotionally driven heuristics, which strengthens investor risk aversion and long-term disengagement. The paper provides an original contribution by connecting systemic vulnerabilities such as weak law enforcement and criminal infiltration to reduced investment performance. It emphasizes the need to address both structural and perceptual barriers to unlock sustainable economic growth in transitional economies.

Results and Discussions

The empirical and theoretical analysis describes Albania as a small transition economy with hidden growth potential, influenced by favorable geography, resource supplies, and increasing global integration. However, these strengths are significantly challenged by structural issues long-standing institutional weaknesses, widespread corruption, deep- rooted money laundering, and ongoing legal uncertainties. While macroeconomic indicators classify Albania as an “upper middle income” country, comparative measures show a decline in its investment profile. The 2025 FIAA Business Confidence Survey highlights this gap: the current investment climate scores 45 out of 100, with only slight improvement in future outlooks (50/100). Major obstacles include systemic informality, fiscal instability, bureaucratic hurdles, and a shortage of skilled workers. Limited improvements are seen in energy access, public safety, and competition regulation, which are not enough to restore investor confidence.

The informal economy continues to be a major part of the economy estimated at 20–25% of GDP in 2024 with real estate, construction, cash-heavy businesses, and trade-based schemes serving as main channels for money laundering. Despite significant actions by SPAK, including asset seizures and prosecutions, enforcement remains insufficient compared to the amount of illegal money flows.

Behavioral patterns reflect this reality. Under Prospect Theory, investors and consumers act from a loss-averse frame amplifying risks related to legal instability, reputational exposure, and accidental entanglement in criminal circuits. Even modest improvements are dismissed as fragile.

Utility Theory confirms this defensiveness: legitimate market actors face distorted competition, reduced profit margins, and inflated entry barriers. Consumers, facing high living costs and weak institutional guarantees, rationally prefer capital preservation over risky commitments. Both theories converge Albania is perceived and calculated as a high-risk, low-utility investment ecosystem.

Conclusion

The combined assessment of economic theory and Albania’s empirical context shows that the country’s investment climate is influenced by a complex interaction between rational evaluation and behavioral perception. Although Albania has notable structural and geostrategic potential based on its natural resources, geographic location, and gradual integration with European markets this potential is still limited by deep-rooted institutional weaknesses, systemic corruption, ongoing informality, and the widespread influence of money-laundering networks. These factors both distort investors’ rational decision- making, as explained by Utility Theory, and heighten loss- avoidance psychological responses, as outlined in Prospect Theory.

From a behavioral perspective, Prospect Theory explains why investors and consumers in uncertain environments tend to overemphasize potential losses compared to equivalent gains. In Albania, signals such as corruption scandals, legal instability, fiscal unpredictability, and rising structural costs create a persistent “loss frame” that encourages defensive strategies: less willingness to take risks, withdrawal from long-term investments, and a stronger preference for short- term capital preservation. Even when some economic indicators show slight improvements, people see these gains as fragile and not enough to offset ongoing uncertainty. As a result, conservative behavior becomes standard, slowing market activity and weakening the conditions needed for sustainable growth.

From a rationalist perspective, Utility Theory leads to the same conclusion. The costs of doing business such as administrative inefficiencies, bribery, tax ambiguities, reputational risks, and distorted competition from illegal capital often outweigh the expected benefits of formal investment. The dominance of informal and criminal capital in key sectors like construction, real estate, trade, and cash- intensive businesses creates artificial pricing structures that do not reflect true economic value. This distortion reduces profit margins, raises barriers to market entry, and logically causes economic actors to believe that the net utility is not enough to justify large investment commitments.

Together, these theoretical perspectives reveal a clear diagnosis: the Albanian market is seen as and truly functions as a high-risk, low-benefit environment where both emotional resistance and rational calculation discourage productive investment.

To break this dual cycle of mistrust and diminished utility, Albania must undertake a deep institutional and economic transformation. Key priorities include strengthening the rule of law, ensuring legal certainty in commercial transactions, improving judicial effectiveness, and establishing strong, irreversible mechanisms for asset confiscation and preventing criminal capital infiltration. Equally important are stabilizing fiscal policy, simplifying administrative procedures, and increasing tax transparency, all of which would reduce systemic uncertainty and lower operational costs for legitimate businesses. Restoring fair competition through close monitoring of sectors prone to money laundering is vital for re-establishing market integrity.

Beyond structural reforms, Albania must also address the psychological aspects of economic decision-making. Only through credible communication, measurable institutional performance, and a clear long-term reform vision can collective loss aversion be lessened and investor confidence shifted toward opportunity rather than risk. Strengthening institutional stability and public trust together is the only viable way to transform Albania’s investment climate and realize its true economic potential.

Disclosure Statement

The authors have no conflict of interest.

Authors Contributions

Bozheku E contributed to the development and integration of the Money Laundering concept in Albania within the framework of Utility and Prospect Theory, compiling existing documentation in this field. She proposed and explored extending behavioral finance to economic realities marked by high informality, money laundering, and corruption.

Profkola K contributed to the analysis and interpretation of economic and investment data and theories for the work.

Cucllari I drafted the results and conclusions in collaboration with the coauthors and critically revised it. All gave final approval and agreed to be accountable for all aspects of the work, ensuring integrity and accuracy.