Positive Feedback from Price Signals in Asset Markets
In asset markets, price changes can trigger positive feedback loops that destabilize the market. When an initial price increase is seen as a signal of future rises, it encourages more buying, shifting demand outward and causing further price increases, which can create an asset price bubble. Conversely, an initial price decrease can be interpreted as a sign of a market collapse, prompting selling that drives prices down even further in a self-reinforcing cycle. In both cases, the feedback loop amplifies the initial shock, pushing the market away from its fundamental equilibrium.
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