Positive Feedback

A positive feedback mechanism refers to amplifying or magnifying a certain disturbance or activity in a feedback loop, leading to an increase in magnitude. Thus, a particular activity goes on in cycles, and with each cycle, the strength of the activity is increased. So, the aim of this mechanism is to amplify or enhance a change or deviation from a normal state, in order to achieve a desired outcome.

Positive feedback is often associated with system instability and is sometimes favored. Hence, it need not always be advantageous and thus depends on the situation. The concept has wide applications in biology, engineering, economics, sociology, chemistry, meteorology, and trade finance. 

• Positive feedback definition refers to a system where the magnitude of the input gets amplified at the end of each loop. Thus, the disturbance keeps repeating in a feedback loop, increasing strength.
• As opposed to this, negative feedback leads to a dampening effect, and the magnitude of the input keeps reducing at the end of each loop.
• The merits and demerits of the feedback system depend on the input itself. If the input is considered favorable, its amplification is considered beneficial. On the other hand, if the input is not desirable, its amplification can be dangerous.
• Positive feedback can be commonly seen in business and trade settings, where positive reinforcements can lead to the growth of entrepreneurship or investment.  

Positive feedback mechanisms can be easily understood by knowing feedback loops. In a feedback loop, the input goes into the system giving the output, and the output re-enters the system as the new input giving another output. This can have two outcomes: the input strengthens every time or dampens. The former is considered positive, and the latter negative.

If the feedback is positive, the magnitude of the input keeps increasing at the end of each loop, that is, with each input-output step. 

The concept has wide applications in investing. Consider these two examples. Firstly, herd mentality is a common phenomenon in investing. A stock is highly valued, and everyone wants to buy it. As a result, more and more people would want to hold such stock with each passing second. The same goes for a declining investment, too, except more people would want to sell it. The same scenario can be seen in a commercial market.

Secondly, what motivates investors? Returns. If a beginner initially faces any loss, they would be demotivated and might not want to invest again. But if the investor makes satisfactory returns continuously, they will be motivated to keep investing and making returns. A positive outcome keeps triggering another. But the applications of feedback systems as a whole are vast. In biology and engineering, there are many concepts and theories based on these. 

Here are some examples of the positive feedback system in finance.

Example #1

James is a finance student who wants to start investing by himself. So, he did some research, planned accurately, and made high returns on his first investment. Motivated by this, he started investing more, and within six months, he was able to make extremely high returns. So, he decided to invest heavily in company Q, which promised high returns.

However, his luck begins to wane, and his enthusiasm leads him to a bad investment that results in him losing his total investment. He had completely relied on his luck or was overconfident about his skills and needed to assess the investment thoroughly before buying it. Here, the back-to-back higher returns made positive feedback but were eventually disrupted.

Example #2

The Department of Consumer Affairs in India has proposed new guidelines to end fake online reviews influencing consumer decisions and opinions. Online reviews by internet platforms like Google, Facebook, Amazon, and other food delivery apps function as positive feedback loops. The more people see positive reviews, the more they form a positive image of the product or company, which tends to go on. But what if the review is fake? 

Keeping this in mind, the government has encouraged companies to stop accepting such reviews and, most importantly, not to downplay the negative reviews. The government has recommended that platforms like Facebook and Google validate the person doing the reviews through 6-8 mechanisms and keep the picture clean. The guidelines are not mandatory for now, and failing to address or identify fake reviews is not a compliance breach. But once the rules are in place, the companies might face action for not acting up against such reviews.

Here are the main advantages of a positive feedback system:

• The most important advantage of a positive feedback system is that it facilitates the amplification of certain favorable activities. For example, a company with an extraordinary selling strategy can generate more sales through word-of-mouth marketing. 
• In a favorable event, the system need not be controlled regularly due to the self-perpetuating feature. 
• Also, positive feedback can generate more favorable outcomes thanks to the herd mentality factor. For instance, Company Z is issuing an IPO, and there is too much hype for the stock. So when more people start buying the stock, the demand is high, and the company can increase the stock price. 

In this regard, it is necessary to mention that continuous enthusiasm in the market might lead to a bubble and, eventually, a stock market crash. Besides, positive feedback can be beneficial if the event or disturbance is favorable. For example, herd mentality keeps pushing the price downward if a company's stock price starts falling.

Let's compare the positive and negative feedback loop forms.

• Negative feedback is the exact opposite of positive one. As in any feedback loop, the output of a particular step is the input of the subsequent step. But with each step and passage of time, the effect of any disturbance or the magnitude of the activity keeps falling.
• This is because constant counteractions occur at the end of the loop, presenting a dampening effect.
• Both positive and negative feedback has many applications in diverse fields of study. 
• In trade finance, these feedback mechanisms guide investors in decision-making. Negative feedback can reduce market volatility, while if the feedback is positive, it can contribute to irrational exuberance.
• However, it can't be generalized as to which feedback is almost always advantageous or disadvantageous. Either feedback mechanism depends on the nature of the activity or disturbance.
• It is important to note that some tend to assume that negative feedback means magnifying a bad or unfavorable disturbance. But in reality, even though the output is bad, it is still positive.

This has been a guide to what is Positive Feedback. Here, we explain its examples, compare it with negative feedback, and its advantages. You can learn more about accounting from the following articles –

• Bandwagon Effect
• Loss Aversion Bias
• Gambler’s Fallacy