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Positive Feedback

Reviewed by Vineeth | Updated on Oct 05, 2020

Catalogue

Introduction:

Positive feedback or a loop of positive feedbacks is a self-repeating trend of investment behaviour in which the ultimate result augments the primary act. Positive feedbacks are capable of significantly improving productivity.

Breaking Down Positive Feedback:

Positive feedback points to the trend of investment behaviour in which a favourable result is generated from the primary act. It can be closing a trade that has resulted in a profit. Further, such feedback provides investors with the confidence to involve in other comparable acts in the pursuit that they are going to be even more profitable in further acts.

As these enhanced actions may also go on to resulting in positive results, behaviours like these usually lead to unfavourable results if they are left unattended. Those investors who are going to experience an instant gain post buying stocks can overprice their self abilities in closing that trade of stock and not factor the fortune and ancillary market conditions.

In the coming days, this may lead to overconfidence and possible mistakes when making decisions related to investments.

Importance:

In the context of investments, positive feedback generally points to the tendency of investors to display a mentality that can occasionally alter irrational exuberance while selling or buying assets.

This kind of mentality can cause an investor to hit the selling mode when the markets are declining and purchase when it's shooting up is a prime example of the overall effects of positive feedback. In simple words, positive feedback is a crucial reason such that market falls often result in further declination; the market rises often result in a further increase, and not returning to logical levels.

For instance, an increase in demand for a capital asset will see the price of that asset skyrocket. This rise can cause investors to purchase that asset in the hopes that they can make profits out of it from the relentless rise in the cost, which will lead to further escalation in demand for that asset.

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