Positive Feedback
A rising price on any share will attract the attention of investors. Not all of those investors are willing or interested in studying the intrinsics of the share and for such people the rising price itself is reason enough to invest. In turn, the additional investment will provide buoyancy to the price, thus completing a positive feedback loop.
Like all dynamic systems, financial markets operate in an ever changing equilibrium, which translates into price volatility. However, a self-adjustment (negative feedback) takes place normally: when prices rise more people are encouraged to sell, while fewer are encouraged to buy. This puts a limit on volatility. However, once positive feedback takes over, the market, like all systems with positive feedback, enters a state of increasing disequilibrium. This can be seen in financial bubbles where asset prices rapidly spike upwards far beyond what could be considered the rational "economic value", only to fall rapidly afterwards.
Read more about this topic: Stock Market Bubble
Famous quotes containing the word positive:
“I believe, as Maori people do, that children should have more adults in their lives than just their mothers and fathers. Children need more than one or two positive role models. It is in your children’s best interest that you help them cultivate a support system that extends beyond their immediate family.”
—Stephanie Marston (20th century)