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Illusionary finance and trading behavior

Author

Listed:
  • HAMADI, Malika
  • RENGIFO, Erick
  • SALZMAN, Diego

Abstract

One important aspect of financial markets 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.

Suggested Citation

  • HAMADI, Malika & RENGIFO, Erick & SALZMAN, Diego, 2005. "Illusionary finance and trading behavior," CORE Discussion Papers 2005004, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  • Handle: RePEc:cor:louvco:2005004
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    File URL: https://uclouvain.be/en/research-institutes/immaq/core/dp-2005.html
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    References listed on IDEAS

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    1. Daniel Kahneman, 2003. "Maps of Bounded Rationality: Psychology for Behavioral Economics," American Economic Review, American Economic Association, vol. 93(5), pages 1449-1475, December.
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    More about this item

    Keywords

    illusionary finance; behavioral finance; evolutionary finance; neuroeconomics;

    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; State Space Models
    • 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)

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