From Wikipedia circa 07-Apr-2012
Feedback is a process in which information about the past or the present influences the same phenomenon in the present or future. As part of a chain of cause-and-effect that forms a circuit or loop, the event is said to “feed back” into itself.
Self-regulating mechanisms have existed since antiquity, and the idea of feedback had started to enter economic theory in Britain by the eighteenth century, but it wasn’t at that time recognized as a universal abstraction and so didn’t have a name.
The verb phrase “to feed back”, in the sense of returning to an earlier position in a mechanical process, was in use in the US by the 1860s, and in 1909, Nobel laureate Karl Ferdinand Braun used the term “feed-back” as a noun to refer to (undesired) coupling between components of an electronic circuit.
By the end of 1912, researchers using early electronic amplifiers (audions) had discovered that deliberately coupling part of the output signal back to the input circuit would boost the amplification (through regeneration), but would also cause the audion to howl or sing. This action of feeding back of the signal from output to input gave rise to the use of the term “feedback” as a distinct word by 1920.
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Positive and negative do not imply consequences of the feedback have good or bad final effect. A negative feedback loop is one that tends to slow down a process, whereas the positive feedback loop tends to accelerate it.
Economics and Finance
The stock market is an example of a system prone to oscillatory “hunting”, governed by positive and negative feedback resulting from cognitive and emotional factors among market participants. For example,
When stocks are rising (a bull market), the belief that further rises are probable gives investors an incentive to buy (positive feedback – reinforcing the rise, see also stock market bubble); but the increased price of the shares, and the knowledge that there must be a peak after which the market will fall, ends up deterring buyers (negative feedback – stabilizing the rise).
Once the market begins to fall regularly (a bear market), some investors may expect further losing days and refrain from buying (positive feedback – reinforcing the fall), but others may buy because stocks become more and more of a bargain (negative feedback – stabilizing the fall).
George Soros used the word reflexivity, to describe feedback in the financial markets and developed an investment theory based on this principle.
The conventional economic equilibrium model of supply and demand supports only ideal linear negative feedback and was heavily criticized by Paul Ormerod in his book “The Death of Economics”, which, in turn, was criticized by traditional economists. This book was part of a change of perspective as economists started to recognize that chaos theory applied to nonlinear feedback systems including financial markets.
My Own Writing
Feedback Loops
- Relationships
- Stock Markets
- Technical Standards
- Confidence
Stock Market
In a bull market, people buy a stock just because it’s gone up in price. That in turn causes the stock price to rise even more, which attracts even more buyers, which causes its price to rise still more, which attracts more buyers, until finally its price becomes so far out of alignment with reality that it finally crashes. We saw this in the late 1990s. Notice how self-perpetuating cycles tend to reach a crisis point and ultimately crash. Economic cycles and business cycles work the same way. Consider the cycle of deflation. As prices drop, profits decline, companies lose money, so they have to lay off workers and have to cut prices even more to stimulate sales, thereby perpetuating the cycle.