![]() Originally developed as a theory to explain economics principles, the notion of feedback loops is now commonplace in other areas of finance, including behavioral finance and capital markets theory. Many people believe financial markets can exhibit feedback loop behaviors. This is, however, an example of a positive feedback loop enhancing a negative outcome. While technically incorrect, many people refer to a negative feedback loop as a self-perpetuating downward spiral where some initial bad event is compounded and made increasingly worse by the behaviors that result from the initial event.Investors using a negative feedback strategy buy stocks when prices decline and sell when prices rise.In markets, negative feedback loops can thus reduce volatility, for example via contrarian investing or value investing. Typically, we divide feedback loops into two main types: positive feedback loops, in which a change in a given direction causes additional change in the same direction.For example, an increase in the concentration of a substance causes feedback that produces continued increases in concentration.Negative feedback refers to a case where outputs from a system are subsequently fed back into it, minimizing or reducing the effect of subsequent iterations.This in turn leads to the supply depleting. When a company has too much inventory supply that it needs to get rid of, it cuts prices to attract more customers to buy their product.to pass stricter laws aimed toward slowing down immigration. borders, local residents become worried that these immigrants are stealing jobs and sucking away resources – this leads the U.S. When a company gets too big and becomes a monopoly, government restrictions force it to break up.Anything that is trying to regulate itself to maintain a certain level of desired amount.How frequently do you switch from accelerating to decelerating? If you increase your desired distance between yourself and the car in front of you, will you switch more rapidly or less rapidly? ![]() Next time you drive think about when you accelerate and decelerate and why. When the distance between you and the car becomes less than your desired distance (you’re to close) you will decelerate, either letting the friction of the road slow you down or applying the breaks. When the distance between your car and the car in front of you increases you accelerate, closing the gap. Often in a balancing feedback loop, there is some sort of implicit or explicit goal. This is why the number of representatives from each party seems to fluctuate around a pretty even split over the years and one party never stays in power for too long In our political system, when a party gains more power, they are attributed more responsibility for the problems that exist and will be less likely to win over voters in the next election. The number of predators will hopefully approach a sustainable level that ecologists call the carrying capacity. ![]() In predator-prey ecosystems, when the number of predators increases, they consume more of their prey, and as the prey become more scarce, more predators die due to the lack of food resources. Cells and living organisms and humans have evolved myriad mechanisms for keeping themselves and their immediate environments stable. In biology, the concept of homeostasis is all about balancing feedback. ![]() At the same time, if your body temperature drops you may start shivering, releasing more heat to warm your body, balancing the initial decrease. When you are cool, you sweat less, so there is less sweat to evaporate and it drains less heat allowing your body temperature to rise. When the internal temperature of your body increases, you sweat, and as that sweat evaporates from the warm surface of your body, you cool down: balancing the initial increase. Balancing feedback loops bring stability or stubbornness to a system (depending on how it is perceived), so they are essential and pervasive. The harder the push, the harder the system pushes back. Balancing feedback loops, or negative feedback loops, are circles of cause and effect that counter a change with a push in the opposite direction. ![]()
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