From the perspective of system thinking, positive feedback increases input through the addition of goals and results, thus increasing results. The positive feedback model can be used in various theoretical analysis of military science, management science and economics. Here, Bill Gates' positive feedback theory in management science and Soros' reflexive theory in economics are given, which are essentially positive feedback models. In the book The Road to the Future, Bill Gates elaborated in detail how he defeated all his opponents with positive feedback theory, thus becoming the industry standard of operating system, and positive feedback also made him the richest man in the world. The financier Soros discussed the reflexivity theory in his book The Alchemy of Finance, and cited many examples in financial markets to demonstrate the reflexivity theory. In the book, he also challenged the equilibrium theory in economics, arguing that economics not only includes equilibrium, but also includes non-equilibrium. Equilibrium is a negative feedback model of system thinking, imbalance is a positive feedback model, and negative feedback and positive feedback models are the two most basic models of system thinking.

1) Positive feedback applies to Bill? Gates' Positive Feedback Model

In "The Road to the Future", Bill Gates introduced how he defeated all competitors through positive feedback theory and made Microsoft system become the industry standard. The low price strategy of Microsoft system makes it sell more products than other competitors, and the more products are sold, the more manufacturers will make compatible software for it, thus increasing the influence of Microsoft system, and then promoting more people to buy Microsoft system, forming a positive feedback effect. Bill? Gates defeated many powerful rivals such as Apple operating system and UNIX through positive feedback theory, making Microsoft system the industry standard and the richest man in the world.

Bill Gates wrote in his book The Road to the Future: "The de facto standard often evolves in the market through economic mechanisms. This economic mechanism is very similar to the concept of a positive spiral that promotes business success. This concept is called positive feedback, which explains why factual standards often appear when people seek compatibility.

In a developing market, as long as there is a slightly better practice than competitors, then the positive feedback cycle begins. This situation is most likely to happen in the following high-tech products, which can be manufactured in large quantities with little cost increase, and part of their value comes from their compatibility. The home video game system is an example. This is a special-purpose computer with a special-purpose operating system, forming a game software platform. Compatibility is also important because the more applications (such as game programs here), the greater the value of the machine itself to users. At the same time, the more machines users buy, the more software developers will develop for them. Once the promotion of a machine reaches a high level, sales will continue to rise. At this time, the positive feedback cycle begins.

One of the most important lessons learned by the computer industry is that computing and its value to users depend on the available quality of computers and various application software.

But the original IBM personal computer can actually choose to load three operating systems-our PC-DOS, CP/M-86 and UCSD Pascal P-System. We know that only one of the three systems can succeed and become the standard. We need to push VHS video to the same strength as every video store to make MS-DOS a standard. We see that there are three ways to make MS-DOS the best.

The first is to make MS-DOS the best product. The second is to help other companies write software based on MS-DOS. The third is to ensure that MS-DOS is cheap.

We made an incredible deal with IBM-that is, we let the company use Microsoft's operating system on many computers it sold at a low one-time cost. This gives IBM the motivation to promote MS-DOS and sell it cheaply. Our strategy succeeded. IBM sells UCSD Pascal P-System for about $450, CP/M-86 175 and MS-DOS for $60.

Our purpose is not to make money directly from IBM, but to make money by selling MS-DOS franchise. Some computer companies want to provide machines that are more or less compatible with IBM personal computers, so we will sell the MS-DOS franchise to these companies. IBM can use our software for free, but it can't enjoy the exclusive right to use and control the upgraded software in the future. This enabled Microsoft to start the business of selling software platform franchise to the personal computer industry. Results IBM abandoned the upgraded versions of UCSD Pascal P-System and CP/M-86.

Users can buy IBM personal computers with confidence. 1982, software developers began to throw out applications running under this DOS. Every new application program enhances the strength of IBM personal computer as a potential industry fact standard.

The positive feedback loop began to promote the PC market. Once started, thousands of applications appeared. Many companies began to manufacture built-in cards or "accessory cards", which expanded the hardware capabilities of personal computers. The benefits of the perfect combination of software and hardware make the sales of personal computers far exceed IBM's expectations-an increase of millions. The positive feedback loop has created billions of dollars for IBM. In recent years, more than half of commercial personal computers are products of IBM, and most other products are also compatible with it.

In three years, almost all personal computer competition standards have disappeared, with the only exception of Apple II and Mac. Hewlett-Packard, DEC, Texas Instruments and Xerox all lost in the PC market in the early 1980s, despite their strong technical prestige and users. The reason is that their machines lack compatibility and have not provided enough improvement to IBM's internal structure. "

Analytical logic:

1) Bill Gates introduced in detail in The Road to the Future that Microsoft beat all other operating systems by using the principle of positive feedback and became the industry standard. What about Bill Gates? Gates' model is a positive feedback model.

2) Bill Gates' positive feedback thought is that when Microsoft's operating system occupies a large share in the market, more software developers will write application software for Microsoft's operating system, so that the value of Microsoft's operating system will increase, more people will buy Microsoft's operating system, and then more software developers will write application programs for Microsoft's system, thus increasing the value of Microsoft's system and promoting sales again. Finally, it forms positive feedback, beats all other opponents and becomes the industry standard.

3) Bill Gates proposed three ways to increase the market share of Microsoft operating system: "The first way is to make MS-DOS the best product. The second is to help other companies write software based on MS-DOS. The third is to ensure that MS-DOS is cheap. "

"We made an incredible deal with IBM-that is, we let the company use Microsoft's operating system on many computers it sold at a low one-time cost. This gives IBM the motivation to promote MS-DOS and sell it cheaply. Our strategy succeeded. IBM sells UCSD Pascal P-System for about $450, CP/M-86 175 and MS-DOS for $60. "

In physics, we know that "the resultant force determines the result". The benefits brought by goods to consumers are the driving force B and the price is the resistance C. The resultant force B-C determines the sales volume, the resultant force conversion rate is K, and Q=K(B-P) is the demand law put forward by quantifiable economics. Microsoft used four methods to increase sales Q (as shown in Figure 3- 14).

"The first is to make MS-DOS the best product. The second is to help other companies write MS-DOS-based software. " These two methods increase consumers' interest in purchasing MS-DOS system. 1 method is to improve the software by Microsoft itself, and the second method is to increase the consumer interest by compatible software. By Q=K(B-P), we can know that increasing B will increase sales Q.

"The third is to ensure that MS-DOS is cheap." The third method reduces the price and the purchase cost of consumers. Q=K(B-P) shows that reducing P will increase sales.

Through the cooperation with the giant IBM, it has gained global promotion and increased the residual conversion rate K. From Q=K(B-P), it can be seen that increasing K will increase sales Q. As a startup company, Microsoft cannot afford such huge marketing expenses for global promotion. If Microsoft didn't cooperate with IBM at first, then the company that gained the initial advantage and finally formed the positive feedback effect was not Microsoft. Microsoft allows IBM to use Microsoft's operating system at a very low cost, thus giving IBM the incentive to promote Microsoft's operating system, not from other countries. Because of IBM's great success in personal business computers, Microsoft's operating system has become the industry standard.

Microsoft makes money by selling operating system franchises to other IBM compatible machine manufacturers.

4) The positive feedback block diagram drawn by Bill Gates. Here, the author analyzes the positive feedback of Microsoft with the system block diagram, and introduces an important principle that the author wants to talk about in economics: consumer surplus determines the purchase quantity; It is not the price that determines the purchase quantity.

Consumer surplus = consumer benefit-price. Consumer benefits refer to the benefits that consumers get from buying a product or service, that is, the value of goods. Consumer surplus is positively related to the number of purchases. The more consumers have left, the more they buy (as shown in Figure 3- 15).

The first method proposed by Bill Gates to increase sales volume is to "make MS-DOS the best product", that is, to increase the benefits brought by the operating system to consumers. From the formula: consumer surplus = consumer interest-price, it can be seen that increasing consumer interest will increase consumer surplus and thus increase sales under the condition of constant price.

The second method is to "help other companies write MS-DOS-based software". Helping other companies to write software compatible with Microsoft system will improve the value of Microsoft system, that is, improve the interests of consumers, which can be deduced from the formula to increase the surplus of consumers and increase the purchase volume.

The third method is: "Make sure that MS-DOS is cheap." Under the condition that consumers' interests remain unchanged, lowering prices will increase consumers' surplus, thus increasing sales.

If Bill Gates uses all three methods, the consumer surplus will become very large and the purchase volume will increase a lot, thus promoting MS-DOS to become the industry standard.

Among the three ways, Microsoft allowed IBM to use Microsoft's operating system on its computer at a very low price, which encouraged the giants in the computer industry to promote Microsoft's operating system. With the success of IBM, its own operating system quickly became the industry standard, thus beating all other operating systems. The failure of operating systems such as Apple system and UNIX system is due to poor compatibility, and even Apple's own system is incompatible, thus reducing the interests of consumers.

2) Positive feedback is applied to Soros's reflexive theory.

Summary: Soros's reflexivity theory is a positive feedback model. Soros attacked the Bank of England with reflexive theory, which triggered the Asian financial crisis. He is the most powerful master of speculation in the world. The mainstream expectation is the resultant force of speculators' purchase, which determines the price rise and fall of financial products, and the price rise and fall of financial products affects the mainstream expectation, and the two reinforce each other and form a positive feedback effect.

Soros's core investment theory is the so-called "reflexive theory". Simply put, reflexive theory refers to an interactive influence between investors and the market. Soros believes that the relationship between financial markets and investors is that investors predict market trends according to their own information and understanding of the market, and their actions actually affect and change possible market trends in turn, and the two constantly influence each other. Therefore, it is impossible for anyone to master complete information, and investors will also be affected by individual problems, thus creating "prejudice" to the market.

In reality, the stock price rises, the purchase volume also rises, the demand law cannot be explained, and the supply-demand curve does not reach the equilibrium point like the equilibrium price curve, but is in an unbalanced state. Financier george soros challenged the equilibrium model of economics through reflexive theorem and financial experience.

In economics, herding effect is used to explain the increase of prices and purchases in the stock market, which is considered as irrational behavior (in conflict with the assumption that people are self-interested), and it is a phenomenon that explains phenomena and lacks explanatory power. Economists also try to avoid the contradiction between demand law and demand law by defining the rise of price and demand in the stock market as irrational behavior. Herd effect refers to the thoughtless herd effect. What financial speculators do all day is to think about which stock to speculate and when to speculate.

George the financier? Soros put forward the theory of reflexivity to explain this imbalance and questioned the traditional economic theory.

George soros, a financier, was the first person to put forward a complete theory to challenge the economic equilibrium, and supported his theory with examples of financial markets such as stock and foreign exchange.

So in order to facilitate understanding, here is a brief introduction to Soros's theory, which comes from his book "Financial Alchemy".

"participants' prejudice

The relationship between participants' thinking and the situations they participate in can be decomposed into two functional relationships. I call the participants' efforts to understand the situation cognitive function or passive function, and the influence of their thinking on the real world as participatory function or active function. In cognitive function, participants' cognition depends on the situation; In the participation function, the situation is influenced by the participants' cognition. It can be seen that these two functions work in opposite directions. In cognitive function, the independent variable is the situation, while in participation function, the independent variable is the participant's thinking.

When two functions work together, they will interfere with each other. Functions produce definite results on the premise of independent variables, but in this case, the independent variables of one function are the dependent variables of another function. The definite result no longer appears. What we see is an interaction, in which the situation and the participants' views are dependent variables, so that an initial change will suddenly cause further changes in the situation and the participants' views at the same time. I call this interaction "reflexivity". Using simple mathematics, reflexivity can be expressed as a pair of recursive functions:

Y = f (x) cognitive function

X = φ (y) participation function

therefore

y = F[φ(y)]

x =φ[F(x)]

This is the theoretical basis of my method. Two recursive functions will not produce a balanced result, only an endless process of change. This process is fundamentally different from the process of natural science research. In natural science research, one set of events follows another set of events without interference from thinking or cognition (although in quantum physics, observation will introduce uncertainty). When a situation contains thinking participants, the causal relationship of events no longer leads directly from one set of events to the next. On the contrary, it links facts with cognition and cognition with facts in a similar way, so the concept of reflexivity has produced a historic "shoe-ring" theory.

Reflexivity of stock market

I replaced the superstition that "the market is always right" with two other propositions:

1. The market always shows some deviations;

2. The market can influence its expected events;

There are many market participants, and their views are bound to be different. Many cancel each other out, and the rest is what I call "mainstream prejudice."

Here I will introduce the second simplified concept. Suppose there is a "basic trend", whether investors are aware of it or not, it will affect the change of stock price, and its influence and degree depend on the views of market participants, which is by no means static. Based on these two concepts, we can imagine the movement trend of stock price as a combination of "basic trend" and "mainstream deviation"

How do these two factors interact? Please recall the two functional relationships mentioned earlier: participation function and cognitive function. The basic trend affects the cognition of participants through cognitive function, and the changes caused by cognition affect the situation through participation function. In the stock market, the stock price is the first to be affected, and the change of stock price in turn affects the bias and basic trend of participants at the same time.

There is a reflexive relationship, and the stock price depends on two factors-basic trend and mainstream deviation-which are in turn influenced by the stock price. There is no constant relationship between stock price and the interaction between these two factors: the independent variable in one function becomes the dependent variable in another function. If there is no constant relationship, a balanced trend will be impossible. The order of market events can only be explained as a historical change process, and no variable-stock price, basic trend and mainstream deviation-can remain unchanged. In a typical sequence of market events, three variables first reinforce each other in one direction, and then reinforce each other in another direction. The alternation of boom and bust is the simplest and most familiar model (as shown in Figure 3- 16).

1) combines the logic of Soros. The basic trend and mainstream deviation affect the stock price, and then affect the basic trend and mainstream deviation. Suppose the mainstream in the market tends to think that the price of a stock will rise and speculators will buy it, which will lead to a further rise in this stock, which will lead to more speculators buying it and the price will continue to rise; When speculators think that the stock will not continue to rise, they will stop buying and the stock price will stay or fall; When speculators think that stocks will fall, they will sell stocks, which will lead to a decline in stock prices, which in turn will lead to more speculators selling stocks and further decline in stock prices. Speculators' motivation to buy stocks is to buy at a low price and sell at a high price in the upward trend of stocks in order to obtain benefits; Selling in the downward trend of stocks means selling at a high price and reducing losses.

2) Draw Soros's reflexive theoretical model. Reflexive theory describes a typical positive feedback, and the rise (fall) of stock price will promote the rise (fall) of stock price in the future. The analysis block diagram is shown in the following figure (as shown in Figure 3- 17).

Basic trends and mainstream prejudices influence speculators to buy and sell stocks. Assuming that the current mainstream trend thinks that the stock price will rise, it will buy stocks; Because they buy stocks, the stock price rises, which strengthens the mainstream trend that speculators think the stock will rise, thus making speculators increase their purchases of this stock (speculators hope to buy stocks at a low price in the early stage of the stock rising trend and sell them before the stock price falls to earn the difference). Further purchase of stocks will further increase the stock price, which will strengthen speculators' belief in the stock price increase. Thereby completing the positive feedback process of stock price rise.

Because the stock price cannot rise indefinitely, the stock price and basic trend will weaken the mainstream trend that speculators think the stock will rise, and eventually lead to the reversal of the mainstream trend. The mainstream trend will start to think that the stock price will fall and start to sell stocks, which will lead to the stock price falling. The falling stock price will strengthen the speculators' tendency to think that the stock price will fall, thus selling more stocks and causing the stock price to fall further. Thereby completing the positive feedback process of stock price decline.

The stock price will have two feedback effects on speculators. One is positive feedback, which will increase the speculative trend of speculators. One is negative feedback, which reduces this trend, and the price increase in line with the law of demand reduces the purchase.

When the stock price rises, the positive feedback of the price will make speculators think that the stock price will rise further, thus tending to increase purchases. When the stock price rises, the cost of obtaining the same stock rises and the relative value of the stock falls, which will weaken the speculators' purchase. Speculators make a choice between value and speculation, and in many cases speculation plays a greater role.

3) Add other necessary factors. In addition to the interaction between price and speculators' behavior, the external environment will also affect speculators' behavior. For example, the evaluation of a stock by media opinion will affect the behavior of speculators. Sometimes even without any tendentious public opinion evaluation, just mentioning this stock will affect speculators' speculation. The financial market is very sensitive, and any small disturbance may produce big results (as shown in Figure 3- 18).

4) Analyze others' understanding. Robert J. Shiller, winner of the 20 13 Nobel Prize in Economics, also introduced the theory of positive feedback in irrational prosperity, which he called' feedback loop', and Ponzi scheme is a feedback loop. Schiller wrote: "The amplification mechanism is realized through a feedback loop.

Loop) works. The feedback loop is a natural Ponzi process-past price increases have enhanced investors' confidence and expectations, and these investors have further raised their stock prices to attract more investors. This cycle continues, leading to an overreaction to the original factors. ..... In the feedback loop theory, the initial price increase leads to the emergence of a higher price level, because the result of the initial price increase is fed back to a higher price through the increase of investor demand. The second round of price increase is fed back to the third round, then to the fourth round, and so on. Therefore, the initial role of inducing factors is amplified, leading to a price increase far greater than itself. This feedback loop is not only the factor that forms the famous bull market and bear market in the whole stock market, but also related to the rise and fall of personal investment. Of course, there may be differences in details between the two. ..... No matter what kind of feedback loop theory is at work, speculative bubbles can't exist forever. Investors' demand for stocks cannot expand forever, and when this demand stops, the price increase will also stop. "

Soros's reflexive theory and Shearer's feedback loop theory are essentially positive feedback theories. This theory can also be explained by the formula Q=K(B-P) of the law of demand. The difference between speculation and ordinary commodities is that a price increase of P will lead to an increase in the demand of B. When a certain factor leads to an increase in the price of P, speculators hope to seize the upward trend of stocks and buy and sell before the price falls, so as to obtain the income of buying low and selling high. The rise of stock price P leads to the increase of stock demand and speculative interest B. At the beginning, the increase of speculative interest B is greater than the increase of price P, leading to B-P >; 0, the purchase volume has been increasing, forming a positive feedback process of stock rising. After a period of time, the increase of speculative interest B decreases, while the price P is still increasing, B-P=0, and the purchase amount at this time is 0. When the mainstream trend finds that the price P paid is too high, demand begins to reverse, demand begins to decline, and speculative interest B begins to decline, B-P.

Excerpt from Quantifiable Management