Illusionary Finance and Trading Behavior
AbstractOne 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.
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Bibliographic InfoPaper provided by Université catholique de Louvain, Département des Sciences Economiques in its series Discussion Papers (ECON - Département des Sciences Economiques) with number 2005012.
Date of creation: 01 Sep 2004
Date of revision: 15 Jan 2005
Illusionary Finance; Behavioral Finance; Evolutionary Finance; Neuroeconomics;
Find related papers by JEL classification:
- C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
- C35 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Discrete Regression and Qualitative Choice Models; Discrete Regressors; Proportions
- G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
This paper has been announced in the following NEP Reports:
- NEP-ALL-2005-05-29 (All new papers)
- NEP-CBE-2005-05-29 (Cognitive & Behavioural Economics)
- NEP-CFN-2005-05-29 (Corporate Finance)
- NEP-FIN-2005-05-29 (Finance)
- NEP-PKE-2005-05-29 (Post Keynesian Economics)
- NEP-RMG-2005-05-29 (Risk Management)
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