System Dynamics Online Postgraduate University Course

WHAT IS SYSTEM DYNAMICS ?

The approach of System Dynamics is radically different from other existing techniques for the construction of socio-economic system models such as econometrics.

Econometric techniques, which are based on behaviourism, use empirical data such as statistical calculus in order to determine the correlation between the various factors involved. The model is developed from the historical evolution of variables that are declared independent. Statistics are applied in order to determine the parameters of the system of equations that link them to other independent variables.

These techniques can establish the behaviour of the system without the need for information regarding its internal functioning. This, for example, is how stock market models analyse the upward and downward trends in the values of shares, the rising and falling cycles, etc. They are designed to minimise the risk of losses, etc. based on data regarding how the subject has behaved in the past.

However, the weakness of the approach of econometrics is that it doesn’t attempt to gain any detailed knowledge of the internal workings of the firm, as the value of a given company rises and falls according to its new products, new competitors, etc. thus, no knowledge of the subject as a SYSTEM is gained.

The basic objective of System Dynamics is very different. It aims to gain understanding of the underlying structural causes of a system's long-term behaviour whether it is a business, industrial, environmental or social system. That's done with the help of software that facilitates the construction of the models as well as performing model simulations. This implies increased knowledge of the role of each element of the system, in order to assess how different actions on different parts of the system accentuate or attenuate its behavioural tendencies.

One characteristic that sets it apart from other methods is that it doesn't aim to give a detailed forecast of the future. Using the model to study the system and test different policies, we will deepen our knowledge of the real world, assessing the consistency of our hypotheses and the effectiveness of each policy.

Another important characteristic is its long-term perspective, meaning that the period studied is long enough for all significant aspects of the system to evolve freely. Only with a sufficiently broad time scale can the fundamental behaviour of a system be observed. We mustn't forget that the results of certain policies are sometimes not the most appropriate, if the time horizon of the decision-making process was too short, or if there was a lack of perspective when the problem was addressed. In these cases, it would be useful to know the long-term consequences of actions taken in the present, and this can be more tangibly attained if we use a suitable model.

The long-term development will be understood only if the main causes of any possible changes are identified. This process is facilitated if the appropriate variables are chosen. Ideally, the limits of the system should include the whole set of mechanisms that are responsible for any important alterations in the main system variables over a broad time horizon.

System Dynamics allows the construction of models after a careful analysis has been conducted of the elements of a system. This analysis allows the internal logic of the model to be extracted. Knowledge may then be gained of the long-term evolution of the system. It should be noted that the adjustment of the model according to historical data is of secondary importance, the analysis of the internal logic and the structural relationships within the model being the key issues involved in its construction.

The methodology:

Identifies a problem.

Develops a dynamic hypothesis explaining the cause of the problem.

Builds a computer simulation model of the system at the root of the problem.

Tests the model to be certain that it reproduces the behavior seen in the real world.

Devises and tests in the model alternative policies that alleviate the problem, and implements this solution.

Part of the book "Theory and Practical Exercises of System Dynamics" More ...