How to Model Noise Traders Investors Using Prospect Theory

Abstract

Looking at stock market composition you will see investor which carry their positions for a long time, as well a bunch of investors that change their position many times within a day. The investor which negotiates using intraday strategy is well known as: noise traders (the day trader’s). The ways their behavior is simulated into the economic theory today using rules of thumbs for them, and include them in a market with others investors that did not use those rules, but use sophisticated mechanism such as expected value instead. The contribution of the paper to the literature is to offer a unified way to model noise traders. Regularly, agent based models in finance use to different rules to model the behavior into the financial market. One for the skilled investors, and other to more naïve ones. The noise traders would be included in the second group. Our proposal is to model both groups with the same rule.