Illusionary Finance and Trading Behavior

Hamadi Malika, Rengifo Erick and Diego Salzman
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Hamadi Malika: UNIVERSITE CATHOLIQUE DE LOUVAIN, Department of Economics

No 2005012, Discussion Papers (ECON - Département des Sciences Economiques) from Université catholique de Louvain, Département des Sciences Economiques

Abstract: One important aspect of financial market is that there might be some traders that intentionally mislead other market participants by creating illusions in order to obtain a profit. We call this new concept illusionary finance. We present an analysis of how illusions can be created and disseminated in financial markets based on certain psychological principles that explain agents’ decisions under time pressure and polysemous signals. We develop a simple model that incorporates the illusions in the price formation process. Furthermore, using powerful simulations, we show how illusions can be incorporated, directly or indirectly, in the expected prices of the traders.

Keywords: Illusionary Finance; Behavioral Finance; Evolutionary Finance; Neuroeconomics (search for similar items in EconPapers)
JEL-codes: C32 C35 G10 (search for similar items in EconPapers)
Pages: 21
Date: 2004-09-01, Revised 2005-01-15
New Economics Papers: this item is included in nep-cbe, nep-cfn, nep-fin, nep-pke and nep-rmg
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Persistent link: https://EconPapers.repec.org/RePEc:ctl:louvec:2005012

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