Feedback loops amplify market fluctuations from "summary" of Why Stock Markets Crash by Didier Sornette
Feedback loops play a crucial role in the dynamics of financial markets, particularly when it comes to amplifying market fluctuations. These loops can create a self-reinforcing cycle that leads to drastic changes in market prices. Imagine a situation where a sudden drop in stock prices leads to panic selling among investors. This selling pressure causes prices to decline even further, triggering more panic selling. This creates a feedback loop where selling begets more selling, driving prices down rapidly.
On the flip side, a surge in stock prices can also trigger a feedback loop that amplifies the upward momentum. As prices rise, more investors may be inclined to buy, lead...
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