How the consequences of our actions can reinforce, weaken, or reverse the forces that produced them.
Why does success sometimes lead to failure? Why do periods of stability give way to instability? And why do people repeatedly make decisions that create the very problems they hoped to avoid?
The answer often lies in feedback loops: a fundamental concept in systems science that explains how the results of a process influence what happens next.
The Power of Feedback Loops
In 1948, mathematician Norbert Wiener helped establish the science of cybernetics, which studies how systems use feedback to regulate their behaviour.
The central insight is simple: causes produce effects, but those effects can also influence their original causes.
Two mechanisms are especially important.
Reinforcing feedback amplifies change. Growth encourages further growth, while decline can accelerate further decline.
Balancing feedback counteracts change. Growth creates pressures that slow it down, while decline can create conditions that support recovery.
These mechanisms help explain why systems can grow, stabilize, fluctuate, or collapse. Time delays can make their behaviour even harder to anticipate.
Why This Matters
Investor Howard Marks provides a powerful case study in Mastering the Market Cycle (2018).
Marks observes that during prosperous periods, investors become increasingly optimistic. Rising prices strengthen their confidence, encouraging them to invest more and accept greater risks.
Their actions push prices higher, reinforcing the belief that conditions are improving.
This is a reinforcing feedback loop.
But prosperity also changes the conditions that made it possible. Easy credit encourages excessive borrowing. High prices reduce prospective returns. Growing confidence weakens caution.
Eventually, these excesses can make the system vulnerable to reversal.
When conditions deteriorate, investors become fearful, lenders restrict credit, and selling pressures increase. The same reinforcing mechanism can now operate in the opposite direction.
Marks captures the broader principle in Chapter XVI:
“Success carries within itself the seeds of failure, and failure the seeds of success.”
The deeper lesson extends far beyond markets.
Success attracts competitors. Efficiency improvements can encourage greater resource consumption. Attempts to correct a problem can create new problems when their delayed consequences are overlooked.
In each case, understanding the immediate cause is not enough. We must examine how the consequences feed back into the system.
Importantly, feedback does not guarantee cycles or reversals. Outcomes depend on the strength of the feedback, delays, constraints, and outside influences.
The Practical Principle
When examining any changing situation, ask:
- What is changing? Identify the trend.
- What reinforces it? Look for consequences that amplify the original change.
- What counteracts it? Identify forces that could limit or reverse the trend.
- What is delayed? Consider effects that may not yet be visible.
- How might behaviour change? Ask how people will respond to the emerging conditions.
Feedback thinking replaces straight-line predictions with an understanding of how systems evolve.
The most important question is not simply what is happening, but how what is happening is changing what happens next.
References
- Wiener, N. (1948). Cybernetics: Or Control and Communication in the Animal and the Machine. MIT Press.
- Meadows, D. H. (2008). Thinking in Systems: A Primer. Chelsea Green Publishing.
- Sterman, J. D. (1989). Modeling Managerial Behavior: Misperceptions of Feedback in a Dynamic Decision Making Experiment. Management Science, 35(3), 321–339. https://doi.org/10.1287/mnsc.35.3.321
- Marks, H. (2018). Mastering the Market Cycle: Getting the Odds on Your Side. Houghton Mifflin Harcourt. Chapters II, VII–IX, XVI.