Positive Feedback

A self-perpetuating pattern of investment behavior. The herd mentality that causes investors to sell when the market is declining and buy when it's rising is an example of positive feedback. Positive feedback is the reason why market declines often lead to further market declines and increases lead to further increases. It is also a source of market volatility. When a cycle of positive feedback continues for too long, it can create an asset bubble or a market crash.

On an individual level, positive feedback can refer to a pattern of behavior in which a positive outcome, such as executing a profitable trade, gives an investor the confidence to pursue further positive outcomes. Developing a rational trading plan and sticking to it can help investors stay confident and maintain a positive feedback loop even when they execute the inevitable losing trade.