Illusionary Finance and Trading Behavior

Malika Hamadi, Erick Williams Rengifo, Diego A. Salzman
2005 Social Science Research Network  
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
more » ... he price formation process. Furthermore, using powerful simulations, we show how illusions can be incorporated, directly or indirectly, in the expected prices of the traders.
doi:10.2139/ssrn.884383 fatcat:dydl2zzctzcl7nnezdhtd2p2rm