Sydney gunman Man Monis was a self-obsessed fantasist who grew increasingly defiant as he edged closer to launching his deadly attack, an inquest has heard.

The man who took 18 people hostage at the Lindt Cafe in December was educated and erratic, secretive about his own life and public about his many grievances, lawyers told the inquest investigating the circumstances of the siege.

Shotgun-wielding Monis took customers and workers captive and made a series of demands, including that he be delivered a flag of the Islamic State group. The stand-off ended when police stormed the cafe in a barrage of gunfire. Iranian-born Monis, 50, was killed, along with two hostages.

"This is not a normal investigation - it is grappling with questions of national significance," coroner Michael Barnes told the court.

"Was Monis a so-called lone wolf prosecuting an IS-inspired terrorist act, or was he a deranged individual pursuing some personal, private grievance in a public manner? They are real questions we must try and answer if an explanation for the siege is to be forthcoming and strategies to avoid a repeat are to be developed."