As Part of The Jewish Oral Law
The Aggadah is part of Judaism's Oral law (תורה שבעל פה) — the traditions providing the authoritative interpretation of the Written Law. In this context, the widely held view in Rabbinic literature is that the aggadah is in fact a medium for the transmission of fundamental teachings (Homiletic Sayings - מאמרים לימודיים) or for explanations of verses in the Tanakh (Exegetic Sayings - מאמרים ביאוריים). In Rabbinic thought, therefore, much of the Aggadah is understood as containing a hidden, allegorical dimension, in addition to its overt, literal sense. In general, where a literal interpretation contradicts rationality, the Rabbis seek an allegorical explanation: "We are told to use our common sense to decide whether an aggada is to be taken literally or not" (Carmell, 2005).
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