Feedback loops are created when reactions affect themselves and can be positive or negative.
Consider a thermostat regulating room temperature. This is an example of a negative feedback loop. As the temperature rises, the thermostat turns off the furnace allowing the room to rest at a predetermined temperature. When the temperature falls below that predetermined temperature the furnace reignites to return the room to its equilibrium state. Other examples include body temperature and financial markets.
Referring to the credit problems in 2008/2009, Vice Chairman of Berkshire Hathaway, Charlie Munger explained:
By the fourth quarter, the credit crisis, coupled with tumbling home and stock prices, had produced a paralyzing fear that engulfed the country. A free-fall in business activity ensued, accelerating at a pace that I have never before witnessed. The U.S. — and much of the world — became trapped in a vicious negative-feedback cycle. Fear led to business contraction, and that in turn led to even greater fear.
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In The Education of a Speculator, Victor Niederhoffer says:
One of the common features that all life possesses is a mechanism for maintaining orderly conditions. This tendency is called homeostasis. In system theory, it is called negative feedback … A Common homeostatic behavior in humans is temperature regulation. If the temperature rises above the 98.6 F optimum for normal human activity, sensors on the skin detect it and signal the brain that a rise has occurred. The brain relays the information to the effectors that increase blood flow to the skin. This induces perspiration. The loss in head, caused by evaporation, lowers the body temperature. When the body cools below a certain point, a comparable mechanism is set off, this time reducing blood flow and causing shivering. This activity generates heat through physical activity thus raising the body temperature.
In Universal Principles of Design, William Lidwell, Jill Butler, and Kritina Holden write:
Every action creates an equal and opposite reaction. When reactions loop back to affect themselves, a feedback loop is created. All real-world systems are composed of many such interacting feedback loops — animals, machines, businesses, and ecosystems, to name a few. There are two types of feedback loops: positive and negative. Positive feedback amplifies system output, resulting in growth or decline. Negative feedback dampers output, stabilizes the system around an equilibrium point.
Positive feedback loops are effective for creating change, but generally result in negative consequences if not moderated by negative feedback loops. For example, in response to head and neck injuries in football in the late 1950s, designers created plastic football helmets with internal padding to replace leather helmets. The helmets provided more protection, but induced players to take increasingly greater risks when tackling. More head and neck injuries occurred (after the introduction of plastic helmets) than before. By concentrating on the problem in isolation (e.g., not considering changes in player behavior designers inadvertently created a positive feedback loop in which players used their head and neck in increasingly risky ways. This resulted in more injuries which resulted in additional redesigns that made the helmet shells harder and more padded and so on.
Negative feedback loops are effective for resisting change. For example, the Segway Human Transported uses negative feedback lops to maintain equilibrium. As a rider leans forward or backward, the Segway accelerates or decelerates to keep the system in equilibrium. To achieve this smoothly, the Segway makes hundreds of adjustments every second. Given the high adjustment rate, the oscillations around the point of equilibrium are so small as to not be detectable. However, if fewer adjustments were made per second, the oscillations would increase in size and the ride would become increasingly jerky.
A key lesson of feedback lops is that things are connected—changing one variable in a system will affect other variables in that system and other systems. This is important because it means that designers must not only consider particular elements of a design, but also their relation to the design as a whole and to the greater environment.
From Graph Algebra by Courtney Brown:
Feedback loops are typically used to accomplish regulation and control. A feedback loop is like an input, but its origin is from within the system itself, not from outside the system. In many systems, the output reenters the system as another input. This is exactly what happens with a microphone and speakers when the sound from the speakers feed back into the microphone, often causing a loud squeal.
Sanjay Bakshi, a visiting professor at MDI wrote an email to one of his students on positive feedback:
In my view, its not correct to always view positive feedback loops in business as destructive, though they well might be. For example a run on a bank can bring it down on its knees in a very short time period and it can spread (systemic risk) to other banks. Similarly stock market bubbles can be thought of positive feedback loops – high prices feed optimism which feeds high prices – it does not last for ever, but it can last for a long long time.
I think you're on the right track when you visualize a positive feedback loop as a mechanism which is nested inside a negative feedback loop. To illustrate, why do bear markets follow bull markets? Because over the long run, markets operate inside a negative feedback loop with built-in corrective mechanisms. When prices run too far away from underlying values, there are forces that pull them back. For example, when stocks become too cheap in relation to the replacement cost of the underlying assets, there is no incentive to create new capacity and industry consolidation is likely to take place wherein the strong players in an industry, instead of creating new capacity, buy out competitors.
Conversely, when stock prices rise so high that they become much more than the replacement cost of the underlying assets, strong incentives are created by those high prices, to create fresh capacity. So shortages follow gluts follow shortages…. – hence a negative feedback loop.
But what caused the speculative bubble in the first place? Why do people suddenly become euphoric about an industry or a sector and invest in it in unison? That part of the answer is better explained by positive feedback loops.
Its also important to view positive feedback loops as means of explaining some of the extreme business successes. I gave two examples in class of the dominant newspaper, and Wal-Mart. But one can think of others. For example, in some industries, the first mover has a big advantage. He goes and captures a very large part of the market and obtains scale economics. And once he's done that, it becomes very difficult to dislodge him.
In 2005 Michael Mauboussin, Chief Investment Strategist at Legg Mason Capital Management offered:
The last idea has to do with systems that exhibit super-linear behavior vs. those that exhibit sub-linear behavior. In the super-linear systems, when you add more, you create more: there's a positive feedback loop. One of the most direct uses of this in markets is network effects—the value of a good or service increases as more people use that good or service.The prototypical example would be eBay. They started out with their basic auction business which has very clear network effects. Then they moved into PayPal which is a payment business. It also derived benefits from network effects. Last week they announced the acquisition of Skype. Once again it's a network effects business.
Sub-linear systems are concerned with maximizing efficiency per unit in industries that are relatively mature. Using capital to innovate may not be the best path for these types of companies: they should work on efficiency instead.
In 2002, Mauboussin offered an example of ants and positive feedback:
The power of this collective effect has not been lost on nature. This is where Johnson's stories about ants come in. How do the ants do it? Foraging ants depart the nest with one job in mind, to find and retrieve food. They also have the ability to leave and follow chemical trails. At first, they disperse randomly. When the ants that find food come back to the nest, they leave a chemical trail that their sisters can follow. Studies show that this process allows ants to consistently find the shortest path to the food.
Once researchers understood this collective ability, they decided to play a trick on the ants. In a controlled setting, the scientists placed two food sources at identical path lengths from the nest. As it turned out, the ants ended up using just one of the paths, although which one they chose was random. Why? Because they follow chemical trails, a couple more ants going down one path will attract other ants, triggering a positive feedback loop. So instead of finding an optimal solution, the ants have one crowded path and an equidistant, empty path. Amazingly, though, nature anticipated this problem as well. As it turns out, ants periodically break from the main path and begin a random search process again. The ants are programmed to strike a balance between exploiting a known food source and exploring for the next food source. The ants are hard-wired to seek diversity.
In Earth in the Balance, Al Gore writes:
When I was flying over the Amazon rain forest in small place i was struck by what happened immediately after a thunderstorm moved across an area of the forest: as soon as the rain stopped, clouds of moisture began to rise from the trees to form new rain clouds that moved west, driven by the wind, where they provided the water for new rain falling out of new thunderstorms. Any interruption of this natural process can have a magnificent impact. When large areas of rain forest are burned, the amount of rainfall recycled to adjacent areas is sharply reduced, depriving those areas of the rain they need to maintain their healthy condition. If the deforested area is large enough, the amount of rainfall removed from adjacent areas will be enough to cause a reinforcing drought cycle, which slowly kills more trees, thus further reducing rainfall recycling and accelerating the death of the forest in turn.
From Thomas Goetz in Wired:
…So feedback loops work. Why? Why does putting our own data in front of us somehow compel us to act? In part, it’s that feedback taps into something core to the human experience, even to our biological origins. Like any organism, humans are self-regulating creatures, with a multitude of systems working to achieve homeostasis. Evolution itself, after all, is a feedback loop, albeit one so elongated as to be imperceptible by an individual. Feedback loops are how we learn, whether we call it trial and error or course correction. In so many areas of life, we succeed when we have some sense of where we stand and some evaluation of our progress. Indeed, we tend to crave this sort of information; it’s something we viscerally want to know, good or bad. As Stanford’s Bandura put it, “People are proactive, aspiring organisms.” Feedback taps into those aspirations.
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In the absence of feedback loops, the natural distribution of phenomena would be 50/50–inputs of a given frequency would lead to commensurate results. It is only because of positive and negative feedback loops that causes do not have equal results. Yet it also seems to be true that powerful positive feedback loops only affect a small minority of the inputs.
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How Do Excellent Performers Differ from the Average?
Practice activities are worthless without useful feedback about the results.
Feedback loops are part of the Farnam Street Latticework of Mental Models.