If we define both the observer and the “observed” as both being part of say an even bigger system, would the wave function still collapse in this system?
This conundrum is known as the Wigner’s Friend problem, though it is also often asked with reference to Schrodinger’s cat.
In my opinion its best resolution is in the understanding that the wave function or quantum state is not a property of the system itself but of its relationship to an observer, and I think this view is a better reading of what Hugh Everett was describing in his “Relative State” interpretation of quantum mechanics [which was re-presented later (mostly by others) as a “Many Worlds” interpretation where observations (and other interactions) continually cause the creation of new “branches” (in a way that Everett himself apparently once described as “bullshit” in a marginal note on someone else’s elaboration of the MWI)].