Feedback

For other uses, including Audio feedback, see Feedback (disambiguation)

Feedback in economics and finance

A system prone to hunting (oscillating) is the stock market, which has both positive and negative feedback mechanisms. This is due to cognitive and emotional factors belonging to the field of behavioral finance. For example,

Related Topics:
Stock market - Behavioral finance

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• When stocks are rising (a bull market), the belief that further rises are probable gives investors an incentive to buy (positive feedback); 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).
• Once the market begins to fall regularly (a bear market), some investors may expect further losing days and refrain from buying (positive feedback), but others may buy because stocks become more and more of a bargain (negative feedback).

George Soros used the word reflexism to describe feedback in the financial markets and developed an investment theory based on this principle.

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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 recognise that Chaos Theory applied to nonlinear feedback systems including financial markets.

Related Topics:
Economic equilibrium - Paul Ormerod - Chaos Theory

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