Positive Feedback Loop Examples
Feedback
A response to an action or a stimulus is called feedback. It is the response or reaction to something after it happens, such as the response or reaction of consumers to a price increase. Feedback can be positive or negative.
Positive Feedback
Feedback is considered positive if it goes in the same direction as the direction of the action or stimulus that causes it to trigger. The positive feedback makes the stimulus bigger.
For example, an increase in consumer spending (stimulus) will increase national income (feedback) through an increase in aggregate demand. This increase in national income will further increase consumer spending, making the stimulus bigger. This is a positive feedback mechanism.
Negative Feedback
Feedback is considered negative if it goes in the opposite direction as the direction of the action or stimulus that causes it to trigger. The positive feedback makes the stimulus smaller.
For example, a depreciation of a country’s currency (stimulus) will make its exports cheaper, and as a result, the value of exports will increase (feedback). This increase in exports will increase the demand for currency, leading to its appreciation. So, the feedback (higher exports) has acted in the opposite direction of the stimulus (currency depreciation), making the stimulus weak. This is a negative feedback mechanism.
Another example is the air conditioning system working in our homes and offices. When the room temperature increases (stimulus) from a set point, the air conditioner starts cooling (feedback) which reduces the room temperature.
Feedback Loop
A continuous system in which an action or stimulus generates a response or feedback, which again becomes a part of the stimulus, is called a feedback loop.
A feedback loop can also be positive or negative. The feedback system is a cause-and-effect system in which the feedback becomes one of the components of the variable input. In this system, the feedback becomes part of the original stimulus and triggers new cycles.
Feedback Loop Examples
The following are some examples of feedback loops:
Customer Feedback Loop
Customer feedback helps businesses improve themselves. Customer complaints help businesses stop practices that customers dislike. But customer praise helps businesses keep doing the same things in a loop. The changes and sameness in businesses can both affect the customer experience and behaviour towards business and its products, which will lead to another round of feedback.
Pricing Feedback Loop
The pricing feedback loop is helpful for companies to set an initial price for a new product. Consumer behaviour will tell you whether the prices are favourable or not. For example, if the prices are too high, consumers do not prefer to buy these products. This feedback will trigger companies to lower their prices, which helps consumers buy from that company and generate sales for them.
Product Development Cycles
Product development cycles can also be influenced by feedback. When famous brands launch products on the same day every year, consumers understand their pattern, thus increasing the sale and demand of those products. This feedback from consumers helps them launch new products on the same dates.
Positive Feedback Loop
A positive feedback loop refers to a situation where the feedback amplifies or reinforces the stimulus. In other words, the stimulus and feedback work in the same direction and are mutually reinforcing. In this situation, a small change in stimulus will bring a large change in the same stimulus because the feedback will strengthen it.
Positive Feedback Loop Examples
The following are some examples of positive feedback loops:
Housing Market
We can see a positive feedback loop when the housing market is booming. When there are low interest rates and a rising consumers’ income, then there is a high demand for buying houses (stimulus), which increases the price of houses (feedback). The increasing house prices can encourage some investors to buy more houses in order to get benefit of the rising prices. This will increase the demand for houses further.
A Vicious Cycle
A low GDP or national income will lead to a vicious cycle for a country’s economy. A low income (stimulus) means low savings and low investments (feedback) which lead to a further decrease in income and make poverty worse in the form of a vicious cycle.
The Multiplier Effect
The multiplier effect refers to a small increase in injections leading to a large increase in national income. An increase in investment (stimulus) will increase national income (feedback) because investment is an injection into the circular flow of income. This increase in national income will increase consumption through circular flow and will create a further increase in national income. A large increase in national income means the availability of more money for investments.
Network Effect
A network effect means an increase in the value of something with an increase in the number of its users. This network effect is an example of a positive feedback loop. For instance, social media platforms took advantage of the network effect. For example, in the case of Instagram, when a new user creates an account, it leads to the creation of more content, which makes Instagram more useful and valuable for other users. Hence more people will join Instagram and it will grow.
Differences between Positive Feedback Loop and Negative Feedback Loop
The following table contains the main points of difference between positive feedback loop and negative feedback loop.
Herding Behaviour
Herding behaviour or bandwagon effect is an example of positive network externality. It refers to situation when people follow the crowd. One person wants to have something because others have that. Investors following this behaviour will prefer to sell when the market goes in decline (everyone is selling) and encourage buying when the market rises (other are buying). This is known as an example of the aggregate effects of positive feedback. Generally, we can say that a positive feedback loop is the reason for market decline which leads to further market decline instead of returning to normal values.
For example, when the demand for security increases, the price of that security also increases. This increase will motivate investors to buy these securities in the hope that they will earn a profit. This practice will further increase the price and demand for that security.
Irrational Exuberance
An investor’s passion will lead to irrational exuberance when the positive feedback loop continues for a long time. Irrational exuberance will cause an asset bubble, due to which the market will crash.
Other Investor Biases
Confirmation Bias
A common investor bias is confirmation bias, is similar to the positive feedback loop. In this bias, investors only focus on information that supports their opinions and ignore controversial opinions. The solution to this bias is to use the information that is used to broaden their viewpoint. In this way, they think that the market is in a positive feedback loop. With the help of this information, investors can make rational decisions about their investments.
Trend-Chasing
Trend-chasing is also a cognitive bias that is related to the positive feedback loop. In this case, investors do not pay attention to the warning about their investment opportunity. But they think that every future investment is related to its past performance.
Solution to Biases
Developing a rational plan is the best solution to these biases. In this way, investors feel confident about their developed system and that it is working as expected.
Feedback Loop in Biology
Feedback loop is a popular topic in biology. Homeostasis is the effort of human body to maintain a stable internal environment. In homeostasis, negative feedback mechanism is more common.
For example, when the temperature of human body rises (stimulus), it send a signal to the sweat glands which start producing more sweat (feedback). This sweat will be exposed to the external environment and produce a cooling effect to reduce to body temperature back to normal. This temperature regulation is an example of a negative feedback loop. Similarly, when we increase the intake of sugar (stimulus), the sensor in our body sense it, the pancreas in our body starts producing insulin (feedback) into the bloodstream which decreases the blood glucose levels in our body back to normal. This is again a negative feedback loop to control blood sugar.
Another example is the activation of platelets in case of an injury. When a person gets an injury, a muscle is wounded or a tissue is torn, and the blood start leaking from the body, a chemical in the body activates the platelets in the blood vessels which move towards the wound and start blood clotting to reduce or stop the blood loss. These activated platelets also release a stimulant chemical which activates more platelets and this process continues until the wound is clotted.
Feedback Loop and the Climate Change
Positive feedback loop is also applicable in terms of climate change. For example, the average temperature of planet earth is increasing due to global warming. When the average temperature of earth rises (stimulus), more ice starting melting which uncovers the land or ocean water below this ice (feedback). This uncovered earth will absorb more heat from the sunlight and it will lead to a further increase in the temperature of earth. When ice sheets melt, the sea level also rises which is again a negative effect in terms of climate systems. This is an example of a positive feedback loop. In the climate system, a positive feedback loop is actually a negative thing and can make the climate unstable.
Conclusion
In conclusion, a positive feedback loop is a continuous cycle in which the direction of feedback is the same as the direction of the stimulus leading to the amplification of the stimulus. In feedback loop, the output becomes input for the next cycle and the circle continues. The feedback loop has its applications in many field including economics, investment and biology.
