Illusionary Finance and Trading Behavior

CORE Discussion Paper No. 2005/4

21 Pages Posted: 1 Mar 2006

See all articles by Malika Hamadi

Malika Hamadi

Surrey Business School

Erick W. Rengifo

Fordham University - Department of Economics - Center for International Policy Studies (CIPS)

Diego A. Salzman

The Research Laboratory for Behavioral Finance

Date Written: January 2005

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.

Keywords: Illusionary Finance, Behavioral Finance, Evolutionary Finance, Neuroeconomics

JEL Classification: C32, C35, G10

Suggested Citation

Hamadi, Malika and Rengifo, Erick W. and Salzman, Diego A., Illusionary Finance and Trading Behavior (January 2005). CORE Discussion Paper No. 2005/4, Available at SSRN: https://ssrn.com/abstract=884383 or http://dx.doi.org/10.2139/ssrn.884383

Malika Hamadi (Contact Author)

Surrey Business School

Surrey Business School
Guildford, Surrey GU2 7XH
United Kingdom

Erick W. Rengifo

Fordham University - Department of Economics - Center for International Policy Studies (CIPS) ( email )

United States
0017188174061 (Phone)
0017188173518 (Fax)

Diego A. Salzman

The Research Laboratory for Behavioral Finance

95 St Martin's Lane
London, wc2
United Kingdom

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