What is a Positive Feedback Loop?

//What is a Positive Feedback Loop?
What is a Positive Feedback Loop? 2017-10-09T05:40:02+00:00

Definition: A positive feedback loop refers to a business situation in which the output serves as the basis for a new input in a business process.

What Does Positive Feedback Loop Mean?

What is the definition of positive feedback loop? A common example of positive feedback loops is the improved employee performance. Successful employee performance assists managers to determine a course of action that can improve the workplace and lead to higher revenues. The output is employee performance that can serve as an input for reinvesting in the company’s core operations. Positive feedback loops are largely used in strategic management. In the contemporary business environment, managers face all sorts of challenges. To anticipate them, they employ positive feedback loop as a self-reinforcing cycle of actions.

Let’s look at an example.

Example

Graham is a financial analyst, who works for Bloomberg. In 2012, he was interviewed by Reuters about the US housing market. Specifically, he was asked if he could see a rebound in real estate, especially in areas most affected by the housing bubble of 2006. Graham said that if the real estate market could regain confidence and equity, then homeowners would be able to refinance their mortgages for 3%, instead of 7% that was the average interest rate during the crisis. Consequently, consumer spending will increase following an increase in disposable income.

In this case, the positive feedback loop enables home refinancing, which will, consequently, boost real estate sales, thereby increasing disposable income. Then disposable income can serve as an input in the process of increased consumer spending, which will boost home sales and will have a wealth effect. The wealth effect will serve as an input in home refinancing, and the cycle of actions will go on.

On the other hand, if home refinancing is not possible at 3%, homeowners will be forced to foreclose their properties. Consequently, consumer spending will not increase because the disposable income will not be sufficient. The cycle of actions will stop there as there won’t be any input to sustain a positive feedback loop.

Summary Definition

Define Positive Feedback Loop: PFL means an action in a business that spurs other actions to increase company performance or efficiency.