Rubber Band Effect – Definition

Cite this article as:"Rubber Band Effect – Definition," in The Business Professor, updated April 10, 2019, last accessed October 25, 2020,


Rubber Band Effect Definition

The Rubber Band Effect is used to describe a situation in markets whereby a force can create both enormous opportunities and high volatility. This paints a picture of rise and fall in security or capital markets. In as much as the market has the tendency of rising high, there is also a tendency of the market values dropping very steeply. Hence, the rubber band effect creates to market, it indicates increase and declines in market prices. This means the level at which a market stretches to in terms of profit, the market can also have the same decrease stretch or shrink.

A Little More on What is the Rubber Band Effect

Oftentimes, the rubber band effect plays out during a limit order by computer programs. A limit order refers to limit at which at buying or selling of stock at a specific price can occur. However, two main market forces which are seen as the basis of market action are the cause of rubber band theory. This theory identifies that it is the same force with which market prices increase that they decrease, just like the rationale behind a stretched rubber band. The theory also paint the effect of the rubber band theory using a pendulum that swings back and forth, this swinging also takes place in markets.

How does the rubber band theory actually work?

Understanding how a rubber band theory works in markets requires a basic understanding of elasticity or flexibility of rubber band. When you stretch a rubber band to one side, it builds up energy and this energy is released forcefully when released towards the opposite direction, this also portrays how huge feats are achieved in markets. This instance shows how opportunities are driven in markets.

However, on the contrary, volatility collapse can also occur using the same rubber band theory. The easier it is for markets values to rise, the same is applicable to volatility collapse. Hence, the rubber band theory presents markets in cycle.

References for Rubber Band Effect

Academic Research on Rubber Band Effect

An evolutionary perspective on socio-technical congruence: The rubber band effect, Betz, S., Mite, D., Fricker, S., Moss, A., Afzal, W., Svahnberg, M., … & Gorschek, T. (2013, October). In Replication in Empirical Software Engineering Research (RESER), 2013 3rd International Workshop on (pp. 15-24). IEEE. Socio-Technical Congruence (STC) is a term or benchmark that is used to examine the impacts of alignment between organizational structure and software architecture. Conway’s law also identifies that there is a connection between a systems architecture and the organizational structure. This paper investigates a verifiable research conducted on Conway’s law and its application cross-site coordination. The study finds out that changes in organizational structure can cause changes in the system or design structure in a socio-technical congruence set up. This study suggests that a rubber band effect be formulated and there should also be another study aside from Conway’s law when examining socio-technical congruence.

Crossmodal effect with rubber hand illusion and gamma‐band activity, Kanayama, N., Sato, A., & Ohira, H. (2007). Psychophysiology, 44(3), 392-402. There are some areas of the brain that respond to multimodal stimuli. Multimodal stimuli refers to the to the assimilation of all sensory modalities when the brain neurons want to receive information. This paper studies the crossmodal effect of rubber band illusion and gamma-band activity. Gamma-band activity explains the pattern of neural movement in humans between the frequency of 25Hz and 100Hz. Cross-modal effects is the study of different sensory modalities involved in an interaction. This paper examines the underlying crossmodal integration, EEG activity in gamma band, and other multimodal integration. The findings of this study are also presented in this paper.

The role of gamma band oscillations and synchrony on rubber hand illusion and crossmodal integration, Kanayama, N., Sato, A., & Ohira, H. (2009). Brain and cognition, 69(1), 19-29. Rubber hand illusion involve and experiment done using a fake part of the body to show the reaction of the brain. This experiment revealed that the brain can become confused or deluded during the rubber hand illusion trick, because of the visuotactile integration process.  This paper is a study of the roles of gamma band oscillations and synchronic movement on rubber hand illusion and cross modal integration. This study examines the effect of rubber hand illusion by measuring electroencephalography (EEG). The study however finds out congruency effect on reaction time (RT), increase at the parietal zero electrode (Pz) and the synchrony of the gamma band activity using the participants of rubber hand illusion.

Rubber hand illusion under delayed visual feedback, Shimada, S., Fukuda, K., & Hiraki, K. (2009). PloS one, 4(7), e6185. Rubber hand illusion (RHI) is a self-ownership test done on the brain by examining the reaction of the brain to a rubber hand illusion trick This paper examines RHI under delayed visual feedback, this is the dependence of the brain on visual movement or information. This paper studies the difference between visual and tactile stimulations that were introduced during a rubber hand illusion experiment. The study also examines the effects of the rubber hand illusion of different condition. Findings of the study and the temporal discrepancy between visual stimulation and rubber hand stimulation are discussed.

Functional and dynamic properties of visual peripersonal space, LĂ davas, E. (2002). Trends in cognitive sciences, 6(1), 17-22. This article presents a study on the functional and dynamic properties of visual peripersonal space. Peripersonal space (PPS) ordinarily refers to the region of space surrounding a part of the body. This study identifies that there are peripersonal space in the visual region and it aims to examine the peculiar attributes and functional properties of this space. This paper further demonstrates the need for an integrated system that controls visual and tactile inputs within peripersonal space. This paper however examines the unique properties of peripersonal space and similarity discovered in that of humans and monkeys.

Rubber band recoil, Vermorel, R., Vandenberghe, N., & Villermaux, E. (2006). Proceedings of the Royal Society A: Mathematical, Physical and Engineering Sciences, 463(2079), 641-658. When you stretch a rubber band and release it at one end, there is usually a recoil that takes place at that point when the rubber band is free from its stretched domain. A recoil explains the backward movement of a things when it is discharged. This paper examines recoil process in rubber band and some peculiar factors that are responsible for a recoil of rubber band when it is stretched to its last elasticity domain.  Theories used in the analysis of rubber band recoil include the Saint-Venant’s theory of impacts and the dynamical extension of the Euler–Bernoulli beam equation.

A New Interactive Analog Layout Methodology based on RubberBand Routing, Kobayashi, K., & Dai, W. W. (1996). This paper highlights the new interactive analog layout methodology on rubber band routing. It also examines previous layout systems and their constraints of rubber band routing. The newly-proposed layout methodology will generate topological editing in the geometrical view on rubber band route planning. This paper also explains why the new interactive analog layout methodology was formulated and the concepts that will be integrated in the interactive analog layout methodology.

Exploring the thermodynamics of a rubber band, Roundy, D., & Rogers, M. (2013). American Journal of Physics, 81(1), 20-23. This paper discusses the natural philosophies or thermodynamics of a rubber band. This is an upper-division experiment in thermal physics that involve measuring the tension of a rubber band and how this tension translate to the temperature and length of the rubber band. This study further use a Maxwell relation to detect the change in internal energy and entropy for an isothermal stretch. This exploration of the thermodynamics of a rubber band enable students to assess the factual and investigative predictions of the entropic spring model. It also allows students to examine the change in entropy when a rubber band is stretched.

Rubberband humanitarianism, Nichols, B. (1987). Ethics & International Affairs, 1, 191-210. This journal discusses the impact of humanitarianism of rubber band theory and how humanitarian practices are used in situations that are not political such as providing relief for human suffering. This paper focuses on humanitarian assistance and how these aids are projected in cases like natural or political disasters. Hence, this paper discusses humanitarian mediations for victims of hungers, refugees and even providing support or relief materials for victims of natural or political disasters.  It studies how the rubber band effect does not only affect government and private organizations but also affect humanitarian practices.

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