# Negative Feedback, Positive Feedback, and the Economy

**URL:** <http://discourse.iapct.org/t/negative-feedback-positive-feedback-and-the-economy/7533>\
**Category:** CSG2008\
**Created:** [October 11, 2008, 12:38pm UTC](http://discourse.iapct.org/t/negative-feedback-positive-feedback-and-the-economy/7533 "2008-10-11T12:38:27Z")\
**Posts on this page:** 5\
**Page:** 1

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**Author:** ![BRUCE\_STEPHANIE\_ABBO](http://discourse.iapct.org/letter_avatar_proxy/v4/letter/b/d26b3c/32.png) [@BRUCE\_STEPHANIE\_ABBO](http://discourse.iapct.org/u/BRUCE_STEPHANIE_ABBO)\
**Post date:** [October 11, 2008, 12:38pm UTC](http://discourse.iapct.org/t/negative-feedback-positive-feedback-and-the-economy/7533/1 "2008-10-11T12:38:27Z")

</div>

[From Bruce Abbott (2008.11.0755 EDT)]

This week’s run on the stock market is an excellent  
example of how millions of perfectly good negative feedback loops (a.k.a.  
control systems) can add up to one nasty aggregate positive feedback loop. Investors  
in the stock market presumably have a reference for maintaining a positive  
income stream and investing in stocks is one action they use to achieve this,  
buying them when the market is going up and selling off when the market is  
declining. (I’m oversimplifying here, but I don’t want to  
make the exposition too complicated.) Whether the market is advancing or  
retreating depends on the aggregate behavior of millions of investors. If  
the market is advancing, individual investors act to increase their income  
streams by purchasing more stocks; when the market is declining, they _may_ sell off stocks in order to reduce  
losses. (Because the market is subject to short-term fluctuation, their  
portfolio-value input functions tend to ignore short-term losses unless they  
become large or the rate of loss gets high. Also, the loop gain varies  
among investors; those with relatively low loop gains will not begin to sell  
until the error becomes relatively large.) As the market average  
declines (and especially as the rate of loss accelerates), more and more  
investors sell off, causing further and faster declines in the market average,  
resulting in more investors selling off. When, as in this case, a change  
in a variable feeds back to further amplify the change (rather than opposing the  
change), we have positive feedback. So millions of perfectly good  
negative feedback control systems, acting to oppose the effect of declining  
stock values on their incomes, create an aggregate positive feedback loop that  
produces losses for almost everyone. It’s a nice example of the  
phenomenon that has been termed “the tragedy of the commons,” which  
refers historically to the overgrazing and resulting destruction of community  
pastures (the commons) that resulted when it was to each individual farmer’s  
advantage to graze his or her animals on the commons before doing so on the  
farmer’s own land. What was good in the short run for each farmer individually  
was bad in the long run for them all.

Bruce A.

---

<div class="post-metadata">

**Author:** ![rsmarken](http://discourse.iapct.org/user_avatar/discourse.iapct.org/rsmarken/32/3553_2.png) [@rsmarken](http://discourse.iapct.org/u/rsmarken)\
**Post date:** [October 11, 2008, 5:15pm UTC](http://discourse.iapct.org/t/negative-feedback-positive-feedback-and-the-economy/7533/2 "2008-10-11T17:15:19Z")

</div>

[From Rick Marken (2008.10.11.1010)]

> Bruce Abbott (2008.11.0755 EDT)--
> 
> This week's run on the stock market is an excellent example of how millions  
> of perfectly good negative feedback loops (a.k.a. control systems) can add  
> up to one nasty aggregate positive feedback loop.

I'm not sure that stock traders are really in negative feedback loops  
with respect to the variables they are trying to control. I think they  
in conflict. Each wants to buy low and sell high. I agree that one  
thing all are controlling is their income and/or the first derivative  
thereof. But I don't think any trader, individually, can control their  
income stream in the way one controls a variable in the physical  
world.

What one does to affect one's own income is a disturbance to what  
another does to control his or her income. My guess is that this is  
always a fairly unstable situation, always on the verge of a runaway.  
I think we need a simulation to see how variables affect it. But the  
instability of such market's has already been noted; that's why they  
have been regulated -- to stop the runaway conditions. I believe that  
is why markets are never really "free".

I think it would be worthwhile to try to model a stock market; I don't  
think you would need that many traders to show how it can go south  
(or, for that matter, "bubble"). I think Bill already has the start of  
such a model (a model of traders in a market). My only point here is  
to suggest that traders in a market, though they are control systems,  
are not in a true negative feedback relationship with respect to some  
of the variables they are trying to control because they are in  
conflict with other control systems (who are, therefore, also not in a  
true negative feedback relationship with respect to the variables they  
control).

Best

Rick

> **···**
>
> > Investors in the stock  
> > market presumably have a reference for maintaining a positive income stream  
> > and investing in stocks is one action they use to achieve this, buying them  
> > when the market is going up and selling off when the market is declining.  
> > (I'm oversimplifying here, but I don't want to make the exposition too  
> > complicated.) Whether the market is advancing or retreating depends on the  
> > aggregate behavior of millions of investors. If the market is advancing,  
> > individual investors act to increase their income streams by purchasing more  
> > stocks; when the market is declining, they may sell off stocks in order to  
> > reduce losses. (Because the market is subject to short-term fluctuation,  
> > their portfolio-value input functions tend to ignore short-term losses  
> > unless they become large or the rate of loss gets high. Also, the loop gain  
> > varies among investors; those with relatively low loop gains will not begin  
> > to sell until the error becomes relatively large.) As the market average  
> > declines (and especially as the rate of loss accelerates), more and more  
> > investors sell off, causing further and faster declines in the market  
> > average, resulting in more investors selling off. When, as in this case, a  
> > change in a variable feeds back to further amplify the change (rather than  
> > opposing the change), we have positive feedback. So millions of perfectly  
> > good negative feedback control systems, acting to oppose the effect of  
> > declining stock values on their incomes, create an aggregate positive  
> > feedback loop that produces losses for almost everyone. It's a nice example  
> > of the phenomenon that has been termed "the tragedy of the commons," which  
> > refers historically to the overgrazing and resulting destruction of  
> > community pastures (the commons) that resulted when it was to each  
> > individual farmer's advantage to graze his or her animals on the commons  
> > before doing so on the farmer's own land. What was good in the short run  
> > for each farmer individually was bad in the long run for them all.
> > 
> > Bruce A.
> 
> --  
> Richard S. Marken PhD  
> rsmarken@gmail.com

---

<div class="post-metadata">

**Author:** ![BRUCE\_STEPHANIE\_ABBO](http://discourse.iapct.org/letter_avatar_proxy/v4/letter/b/d26b3c/32.png) [@BRUCE\_STEPHANIE\_ABBO](http://discourse.iapct.org/u/BRUCE_STEPHANIE_ABBO)\
**Post date:** [October 11, 2008, 6:27pm UTC](http://discourse.iapct.org/t/negative-feedback-positive-feedback-and-the-economy/7533/3 "2008-10-11T18:27:28Z")

</div>

[From Bruce Abbott (2008.11.1425 EDT)]

> Rick Marken (2008.10.11.1010)--

> I think it would be worthwhile to try to model a stock market; I don't  
> think you would need that many traders to show how it can go south  
> (or, for that matter, "bubble"). I think Bill already has the start of  
> such a model (a model of traders in a market). My only point here is  
> to suggest that traders in a market, though they are control systems,  
> are not in a true negative feedback relationship with respect to some  
> of the variables they are trying to control because they are in  
> conflict with other control systems (who are, therefore, also not in a  
> true negative feedback relationship with respect to the variables they  
> control).

I agree that constructing a model is the way to test these ideas, but at  
present I have too many things on my plate to get involved in doing that in  
any serious way. But I'd still like you to clarify what you mean that  
investors are "not in a true negative feedback relationship with respect to  
some of the variables they are trying to control." Specific examples would  
be helpful.

When writing my previous post I found it somewhat difficult to state what  
investors might be controlling without making the exposition overly complex.  
"Net worth" might be one, but then people are willing to expend their cash  
to purchase certain goods and services. Of course, spending money to  
satisfy some goals acts as a disturbance to a system that is attempting to  
maintain or achieve some reference level of net worth. But establishing and  
maintaining a positive income stream can be achieved even if one is also  
expending money for goods and services, so I settled on that for my example.  
That's incomplete at best, and certainly even a more complex model for one  
person's system organization would likely not be correct for other  
individuals. Even worse (for model building) is that people will be acting  
on their perceptions and these perceptions often are not in sync with a  
rational analysis, as when one sells after the market suffers huge losses  
because of fear that even worse losses will follow (the aim being to  
preserve what little is left). This action locks in those losses, whereas  
the greatest probability is that the market will eventually recover, and  
with it the value of one's stock portfolio (at least if it's sufficiently  
diversified).

Bruce

---

<div class="post-metadata">

**Author:** ![rsmarken](http://discourse.iapct.org/user_avatar/discourse.iapct.org/rsmarken/32/3553_2.png) [@rsmarken](http://discourse.iapct.org/u/rsmarken)\
**Post date:** [October 11, 2008, 7:09pm UTC](http://discourse.iapct.org/t/negative-feedback-positive-feedback-and-the-economy/7533/4 "2008-10-11T19:09:06Z")

</div>

[From Rick Marken (2008.10.11.1210)]

> Bruce Abbott (2008.11.1425 EDT)]

> I agree that constructing a model is the way to test these ideas, but at  
> present I have too many things on my plate to get involved in doing that in  
> any serious way.

I'll give it a try later today but but I bet Bill posts something  
sooner. He already has a model of buyers and sellers interacting.

> But I'd still like you to clarify what you mean that  
> investors are "not in a true negative feedback relationship with respect to  
> some of the variables they are trying to control." Specific examples would  
> be helpful.

I just meant that they are in a conflict where the variable in  
conflict is money. I want to buy X for very little and sell it back  
for a lot. So I am in conflict with other buyers (to pay as little as  
possible but still more than they do for X) and with other sellers (to  
change as much as possible for X but not so much that it won't be  
sold). A model would have to work out these relationships clearly but  
I think what you would come down to is the fact that traders are in a  
conflict with each other where what one does to get more money for  
himself decreases what the other gets, and vice versa. This is just  
like a tug of war, where the position of the flag corresponds to the  
money in the trading situation. It's not a negative feedback control  
situation because when I act to bring the flag towards me (working  
against the disturbance to the flag that is pulling it the other way)  
I actually increase the disturbance. So my efforts to reduce my own  
error result in increases in the environmental influences that create  
that error. So the feedback loop is not really negative.

I can't wait to hear what Bill says about this. These are my  
non-quantitative ideas but I believe that I did work out a  
quantitative analysis of conflict that shows that, when there is  
conflict, the feedback loop is no longer a control (negative feedback)  
loop.

Best

Rick

> **···**
>
> > When writing my previous post I found it somewhat difficult to state what  
> > investors might be controlling without making the exposition overly complex.  
> > "Net worth" might be one, but then people are willing to expend their cash  
> > to purchase certain goods and services. Of course, spending money to  
> > satisfy some goals acts as a disturbance to a system that is attempting to  
> > maintain or achieve some reference level of net worth. But establishing and  
> > maintaining a positive income stream can be achieved even if one is also  
> > expending money for goods and services, so I settled on that for my example.  
> > That's incomplete at best, and certainly even a more complex model for one  
> > person's system organization would likely not be correct for other  
> > individuals. Even worse (for model building) is that people will be acting  
> > on their perceptions and these perceptions often are not in sync with a  
> > rational analysis, as when one sells after the market suffers huge losses  
> > because of fear that even worse losses will follow (the aim being to  
> > preserve what little is left). This action locks in those losses, whereas  
> > the greatest probability is that the market will eventually recover, and  
> > with it the value of one's stock portfolio (at least if it's sufficiently  
> > diversified).
> > 
> > Bruce
> 
> --  
> Richard S. Marken PhD  
> rsmarken@gmail.com

---

<div class="post-metadata">

**Author:** ![Bill\_Powers1](http://discourse.iapct.org/letter_avatar_proxy/v4/letter/b/8e7dd6/32.png) [@Bill\_Powers1](http://discourse.iapct.org/u/Bill_Powers1)\
**Post date:** [October 11, 2008, 7:48pm UTC](http://discourse.iapct.org/t/negative-feedback-positive-feedback-and-the-economy/7533/5 "2008-10-11T19:48:36Z")

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[From Bill Powers (2008.10.11.1344 MDT)]

Rick Marken (2008.10.11.1210) --

> I can't wait to hear what Bill says about this. These are my  
> non-quantitative ideas but I believe that I did work out a  
> quantitative analysis of conflict that shows that, when there is  
> conflict, the feedback loop is no longer a control (negative feedback)  
> loop.

You and Bruce A. are talking about the same thing. If your action intended to control your own variable calls forth a disturbance (from someone else) that is larger than the effect of your action, the net effect of your action is to increase the error instead of decreasing it. So the feedback becomes positive; it's as if you've reversed the sign in the environmental feedback function.

Best,

Bill P.