In his Three Contributions to the Theory of Sex (1920), Freud discusses the concept of inversion (i.e. homosexuality) with respect to its innateness, or the biological predisposition to homosexuality or bisexuality.
The conclusions that he draws are based on the fact that at early stages of development, humans undergo a period of hermaphrodism. Based on this, he asserts that, "the conception which we gather from this long known anatomical fact is the original predisposition to bisexuality, which in the course of development has changed to monosexuality, leaving slight remnants of the stunted sex."
This develops into a general theory that attraction to both sexes is possible, but that one is more common for each sex. He explains the inversion of homosexual attraction as the result of a traumatic episode or episodes that prevent the normal development of an attraction for the opposite sex.
Freud famously characterized humans as naturally "polymorphously perverse," meaning either that practically any object can be a source of erotic fulfillment, or that babies are relatively indifferent to the object of erotic fulfillment.
Read more about this topic: Innate Bisexuality
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