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Feedback

Feedback occurs when outputs of a system are repeatedly fed back into the system as new inputs, producing more outputs. This cycle continues until the loop is broken. Feedback can be negative, as in the case of a thermostat,

Negative Feedback

or positive, as seen by placing a microphone near a speaker.

Positive Feedback

In the financial markets, price movement, news, or influential people produce investment bias “output” that is fed into the heads of the investment community, who then produce new outputs in the form of buy and sell decisions. If this bias is positive, buying occurs, which leads to higher prices and more positive bias, etc., in a positive feedback loop. A negative feedback loop would look like a "tug of war" between buyers and sellers. As the price is bid up, sellers aggressively step in to sell, which moves price down. Equally aggressive buyers react to take advantage of low prices. The loop continues until one side gives up.