Behavioral finance Glossary (Vicious / virtuous cycle)

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Vicious / virtuous circle

See feedback, reflexivity

When the hungry snake bites its own tail.

Definition

Vicious / virtuous circles are series of reactions that maintain
and amplify
progressively
an initial move.

Theoreticians call them positive feedback loops (see that phrase).

Both loops shown below are "positive", as they amplify an
uptrend or downtrend, instead of (negative loop)
correcting or reverting it .

Virtuous circles improve 
                    continuously the situation. 


Vicious circles worsen it
                      continuously

Economic examples

Money-go-round.


Those circular self reinforcing patterns are often found in consumer or
investor behavior.

Here are several examples:

In case of inflation, due to a shortage of goods or services,

compared to the money available, people protect themselves by
trying to accelerate their purchases and ger rid of the depreciated
money).

This creates more inflation (vicious circle).


In case of recession, people, as a precaution, keep their money.

In case of deflation they wait also for prices to
fall further.

In both cases, this delays their spending, which lengthens the

recession and deflation (vicious circle, again)


Economic growth makes people confident to buy and invest
    more.

This makes the growth last longer
     (virtuous circle).


Also, in asset markets, price rises bring more price rises

and price falls bring more price falls (momentum effect).

What about speed?


There can be a "speed effect" in those economic fluctuations described
above.

In some cases the rate of growth or decay is not only maintained
but it accelerates
.

Then the phenomenon can be called a vicious / virtuous spiral.

For example it can happen that inflation not only persists, but also that
its rate rises.

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This page last update: 11//09/15  

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