U.S.

Department of Energy's

Introduction to System Dynamics

A Systems Approach to Understanding Complex Policy Issues

By:
Michael J. Radzicki
Robert A. Taylor
1997

Adapted from
Foundations of System Dynamics Modeling
Michael J. Radzicki, Ph.D.
Sustainable Solutions, Inc.
Copyright 1997

Prepared for:
U.S. Department of Energy,
Office of Policy and International Affairs,
Office of Science & Technology Policy and Cooperation

System Dynamics and

Overview
The success or failure of a particular policy initiative or strategic plan is largely
dependent on whether the decision maker truly understands the interaction and
complexity of the system he or she is trying to influence. Considering the size and
complexity of systems that public and private sector decision makers must manage, it is
not surprising that the "intuitive" or "common sense" approach to policy design often falls
1

short, or is counter-productive, to desired outcomes. This online book was written to

introduce the concepts and "language" that make a systems-based study of such complex
problems possible. Our intent is to provide the reader with a broad overview of the field
of system dynamics, acquaint him or her with the fundamental stock-flow-feedback
structures that determine the dynamic behavior in systems, and motivate the reader to
begin analyzing problems dynamically and holistically. Knowing how to speak and think
in terms of systems and interconnections is a critical step in effective policy design, policy
implementation, and consensus building.
In Chapter 1, Introduction, we provide some context for system dynamics by
presenting a brief history of the field, beginning with Professor Jay W. Forrester's
work at the Massachusetts Institute of Technology in the 1950's, through the
present day. In addition, work related to energy policy is presented in some detail
to provide the reader with examples of the type of issues that can be studied using
system dynamics principles. In Chapter 2, Why Model?, we continue this
discussion by exploring the question: "Why model at all?"
Chapter 3, Building Blocks, presents the basic concepts behind the study of
complex systems by first examining the patterns of behavior that real-world
systems exhibit, and then discussing the structure that causes such patterns to
emerge. This chapter can be thought of as the "language chapter" because it is here
that the reader learns the conceptsand terms required to construct the "theories" or
"models" of their particular issues.
With the concepts and language of system dynamics in hand, Chapter 4, Simple
Structures, examines system behavioral types such as exponential
growth oroscillation in greater detail. In this chapter, the reader is introduced to the
concept of computer simulation. Current computer simulation technology allows
decision-makers to easily construct models of a system's structure (including
mathematical equations) to use in conducting policy experiments.
In chapter 5, Basic Modeling Process, we share some thoughts and ideas about
theprocess of constructing system dynamics models, from conceptual causal
diagrams through detailed computer simulation models.
Chapter 6, Natural Gas Discovery, reinforces the concepts introduced in the first
five chapters by presenting a case-study based on a well-known system dynamics
model of the U.S. natural gas industry. For this discussion, we recreate the model's
structure incrementally by presenting a series of model versions - each version
increasing in complexity as additional structure is added. Throughout the chapter,
the reader is invited to "run" a computer simulation of the particular structure being
discussed to observe the dynamic behavior first hand.

 Finally in Chapter 7, Next Steps, we conclude with a brief discussion of the

resources available to the reader interested in further study of system dynamics.
Layout of Introduction to System Dynamics
The figure below shows the basic layout of Introduction to System Dynamics. Although
we present the material in what we feel is the most logical learning progression, you are
free to move to any section that interests you by using the chapter and section menus
along the top and left-hand side of the screen, respectively.

System dynamics is a powerful methodology and computer simulation modeling

technique for framing, understanding, and discussing complex issues and
problems. Originally developed in the 1950s to help corporate managers improve
their understanding of industrial processes, system dynamics is currently being
used throughout the public and private sector for policy analysis and design. In this
chapter, we provide some context for this book by presenting a general history of
the field. The land-mark models presented in this chapter will give the reader an
idea of the types of issues/problems that can be explored using system dynamics.

Origin of System Dynamics

Jay W. Forrester and the History of System Dynamics
System dynamics was created during the mid-1950s by Professor Jay W. Forrester
of the Massachusetts Institute of Technology. Forrester arrived at MIT in 1939 for
graduate study in electrical engineering. His first research assistantship put him
under the tutelage of Professor Gordon Brown, the founder of MIT's
Servomechanism Laboratory. Members of the MIT Servomechanism Laboratory, at
the time, conducted pioneering research in feedback control mechanisms for
military equipment. Forrester's work for the Laboratory included traveling to the
Pacific Theater during World War II to repair a hydraulically controlled radar
system installed aboard the aircraft carrier Lexington.The Lexington was torpedoed
while Forrester was on board, but not sunk .
WHIRLWIND I and SAGE
At the end of World War II, Jay Forrester
turned his attention to the creation of an
aircraft flight simulator for the U.S. Navy.
The design of the simulator was cast around
the idea, untested at the time, of a digital
computer. As the brainstorming surrounding
the digital aircraft simulator proceeded,
however, it became apparent that a better application of the emerging technology
was the testing of computerized combat information systems. In 1947, the MIT
Digital Computer Laboratory was founded and placed under the direction of Jay
Forrester. The Laboratory's first task was the creation of WHIRLWIND I, MIT's
first general-purpose digital computer, and an environment for testing whether
digital computers could be effectively used for the control of combat information
systems. As part of the WHIRLWIND I project, Forrester invented and
patented coincident-current random-access magnetic computer memory. This
4

became the industry standard for computer memory for approximately twenty
years. The WHIRLWIND I project also motivated Forrester to create the
technology that first facilitated the practical digital control of machine tools.
After the WHIRLWIND I project, Forrester agreed to lead a division of MIT's
Lincoln Laboratory in its efforts to create computers for the North American SAGE
(Semi-Automatic Ground Environment) air defense system. The computers created
by Forrester's team during the SAGE project were installed in the late 1950s,
remained in service for approximately twenty-five years, and had a remarkable "up
time" of 99.8%.
System Dynamics
Another outcome of the WHIRLWIND I and SAGE projects that is perhaps, for the
purposes of this online book, most noteworthy, was the appreciation Jay Forrester
developed for the difficulties faced by corporate managers. Forrester's experiences
as a manager led him to conclude that the biggest impediment to progress comes,
not from the engineering side of industrial problems, but from the management
side. This is because, he reasoned, social systems are much harder to understand
and control than are physical systems. In 1956, Forrester accepted a professorship
in the newly-formed MIT School of Management. His initial goal was to determine
how his background in science and engineering could be brought to bear, in some
useful way, on the core issues that determine
the success or failure of corporations.
Forrester's insights into the common
foundations that underlie engineering and
management, which led to the creation of
system dynamics, were triggered, to a large
degree, by his involvement with managers at
General Electric during the mid-1950s. At that time, the managers at GE were
perplexed because employment at their appliance plants in Kentucky exhibited a
significant three-year cycle. The business cycle was judged to be an insufficient
explanation for the employment instability.
From hand simulations (or calculations) of the stock-flow-feedback structure of the
GE plants, which included the existing corporate decision-making structure for
hiring and layoffs, Forrester was able to show how the instability in GE
employment was due to the internal structure of the firm and not to an external
force such as the business cycle. These hand simulations were the beginning of the
field of system dynamics.
During the late 1950s and early 1960s, Forrester and a team of graduate students
moved the emerging field of system dynamics, in rapid fashion, from the handsimulation stage to the formal computer modeling stage. Richard Bennett created
5

the first system dynamics computer modeling language called SIMPLE

(Simulation of Industrial Management Problems with Lots of Equations) in the
spring of 1958. In 1959, Phyllis Fox and Alexander Pugh wrote the first version of
DYNAMO (DYNAmic MOdels), an improved version of SIMPLE, and the system
dynamics language that became the industry standard for over thirty years .
Forrester published the first, and still classic, book in the field titled Industrial
Dynamics in 1961.
Urban Dynamics
From the late 1950s to the late 1960s, system dynamics was applied almost
exclusively to corporate/managerial problems. In 1968, however, an unexpected
occurrence caused the field to broaden beyond corporate modeling. John Collins,
the former mayor of Boston, was appointed a visiting professor of Urban Affairs at
MIT. Collins had been stricken with polio during the 1950s and, as a result,
required an office in a building with automobile access to the elevator level. By
chance, Jay Forrester's office was located in such a building and the office next to
his was vacant. Collins thus became Forrester's work-day neighbor, and the two
began to engage in regular conversations about the problems of cities and how
system dynamics might be used to address
the problems.
The result of the Collins-Forrester
collaboration was a book titled Urban
Dynamics . The Urban Dynamics model
presented in the book was the first major
non-corporate application of system
dynamics . The model was, and is, very controversial, because it illustrates why
many well-known urban policies are either ineffective or make urban problems
worse. Further, the model shows that counter-intuitive policies -- i.e., policies that
appear at first glance to be incorrect, often yield startlingly effective results. As an
example, in the Urban Dynamics model, a policy of building low income
housing creates a poverty trap that helps to stagnate a city, while a policy of tearing
down low income housing creates jobs and a rising standard of living for all of the
city's inhabitants.
World Dynamics
The second major noncorporate application of system dynamics came shortly after
the first. In 1970, Jay Forrester was invited by the Club of Rome to a meeting in
Bern, Switzerland. The Club of Rome is an organization devoted to solving what
its members describe as the "predicament of mankind" -- that is, the global crisis
that may appear sometime in the future, due to the demands being placed on the
earth's carrying capacity (its sources of renewable and nonrenewable resources and
its sinks for the disposal of pollutants) by the world's exponentially growing
6

population. At the Bern meeting, Forrester was asked if system dynamics could be
used to address the predicament of mankind. His answer, of course, was that it
could.
On the plane back from the Bern meeting, Forrester
created the first draft of a system dynamics model of
the world's socioeconomic system. He called this
model WORLD1. Upon his return to the United States,
Forrester refined WORLD1 in preparation for a visit to
MIT by members of the Club of Rome. Forrester called
the refined version of the model WORLD2. Forrester published WORLD2 in a
book titled World Dynamics .
From the outset, World Dynamics drew an enormous amount of attention. The
WORLD2 model mapped important interrelationships between world population,
industrial production, pollution, resources, and food. The model showed a collapse
of the world socioeconomic system sometime during the twenty-first century, if
steps were not taken to lessen the demands on the earth's carrying capacity. The
model was also used to identify policy changes capable of moving the global
system to a fairly high-quality state that is sustainable far into the future.
In response to the notoriety of World Dynamics, the Club of Rome offered to fund
an extended study of the predicament of mankind via system dynamics. As
Forrester was committed to extending his Urban Dynamics project at the time, he
declined to participate. He did, however, suggest that one of his former Ph.D.
students -- Dennis Meadows -- conduct the study. The model that was created by
Meadows and his associates was called WORLD3 and published in a book
titled The Limits to Growth . Although the WORLD3 model was more elaborate
than WORLD2, it generated the same fundamental behavior modes and conveyed
the same fundamental messages as its predecessor. Despite the similarities, The
Limits to Growth received even more world-wide attention than World Dynamics.
Some authors have speculated that this was due to the "friendly" style of writing
that made the book accessible to nontechnical readers .
In 1991, three of the original authors of The Limits to Growth redid the study in
preparation for the twentieth anniversary of the book's publication. The results
were published in a book titled Beyond the Limits . The revised system dynamics
model created for the study was called WORLD3-91. Once again, the results
presented in Beyond the Limits were consistent with the results presented in World
Dynamics and The Limits to Growth, although Beyond the Limits included a
significant amount of numerical data that did not exist when the original studies
were undertaken. Beyond the Limits also contained a careful presentation of
arguments aimed at counteracting the criticisms that were directed at the earlier
world modeling books.
7

The System Dynamics National Model and K-12 Education

During the last twenty years, Jay Forrester's attention has been focused primarily in
two areas: 1) the creation of a system dynamics model of the United States
economy, and 2) the extension of system dynamics training to kindergarten through
high school education. Forrester sees the former project as leading to a new
approach to economic science and a fundamental understanding of the way
macroeconomic systems work. He views the latter project as crucial, not only for
the future health of the field of system dynamics, but also for the future health of
human society.
Although Forrester's national economic model remains
unfinished, early and intermediate results have been
published . The most noteworthy of the results is that the
model generates a forty- to sixty-year economic cycle or
"long wave" that not only explains the Great Depression of
the 1930s, but also shows that deep economic slumps are a
repetitive feature of capitalist economies. At the time of
this writing, Forrester's model shows that the United States economy is just
beginning to rise out of the trough of the latest long wave downturn.
Forrester's efforts to extend system dynamics to K-12 education have, in a sense,
taken him full circle, as the story begins with his original MIT mentor Gordon
Brown. Brown retired from MIT in 1973 and began wintering in Tucson, Arizona.
During the late 1980s, Brown introduced system dynamics to teachers in the
Tucson school system. The results were remarkable. System dynamics spread, not
only through the original junior high in which it was introduced, but through the
entire school district. Subjects as diverse as Shakespeare, economics, and physics
are today taught in the school district, wholly or in part, via system dynamics.
Moreover, the district itself is using system dynamics in an effort to become
a learning organization .
The future of system dynamics in K-12 education appears promising. Today, an
international clearinghouse for K-12 system dynamics materials exists and Internet
and World Wide Web sites have been created to disseminate information .
Numerous K-12 teachers, in the United States and abroad, have begun to integrate
system dynamics into their classes, and attend international conferences on the
subject. All of these developments suggest that the corporate and public sector
decision makers of the future may well begin to view the problems they face
through the lens of system dynamics .

Energy Modeling
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Estimating Fossil Fuel Resources." Journal of Forecasting 4(2): 197-226.
Warsh, David. 1990. "Larry, Curly & Moe in the Persian Gulf: wither Oil Prices?" Boston
Globe(November 25): A33.
Wolstenholme, Eric F. and R. K. Holmes. 1985. "The Design of Colliery Information and
Control Systems." European Journal of Operational Research 20(2): 168-181.
Wolstenholme, Eric F. 1983. "The Relevance of System Dynamics to Engineering System
Design."European Journal of Operational Research 14(1): 116-126.
Wolstenholme, Eric F. 1982a. "Managing International Mining -- A Case Study Concerning
Complex Multiple-Ownership Systems." European Journal of Operational Research 9(2):
133-143.
Wolstenholme, Eric F. 1982b. "The Design and Control of Policies for Underground Coal
Clearance Systems." Dynamica 6(2).
Wolstenholme, Eric F. 1981. "Designing and Assessing the Benefits of Control Policies for
Conveyor Belt Systems in Underground Coal Mines." p. 192. In: Proceedings of the
International System Dynamics Conference. Rensselaerville, NY.
Zahn, Eric K. O. 1981. "Dynamics of Coal in West Germany." p. 252. In: Proceedings of the
1981 International Conference of the System Dynamics Society. Rensselaerville, NY.

The World Models

System dynamics modeling has been used for strategic energy planning and policy
analysis for more than twenty-five years. The story begins with the world modeling
projects conducted in the early 1970s by the System Dynamics Group at the
Massachusetts Institute of Technology. During these projects the WORLD2 and
15

WORLD3 models were created to examine the "predicament of mankind" -- that

is, the long term socioeconomic interactions that cause, and ultimately limit,
the exponential growth of the worlds population and
industrial output .
One of the central assumptions underlying the world
models is that the earths natural resources are, at some
level, finite and that the exponential growth in their use
could ultimately lead to their depletion and hence, to
the overshoot and collapse of the world socioeconomic system. Due to the decision
to explain the "predicament of mankind" with fairly small system dynamics
models, the resource depletion dynamics were represented in the world models
with structures that aggregated all of the earths natural resources into a single
variable.
The decision to represent the earths natural resources in aggregate form did not
take place in a vacuum. As part of the WORLD3 modeling project, several
disaggregated, resource-specific/issue-specific, models were created . The
conclusion drawn from these models was that it was appropriate to lump all natural
resources into a single variable in the WORLD3 model .
The Life Cycle Theory of M. King Hubbert
One of the disaggregated, resource-specific, system dynamics analyses that was
conducted in support of the world modeling efforts was a natural gas discovery and
production model created by MIT Masters student Roger Naill . Naill based his
model on the life cycle theory of oil and gas discovery and production put forth by
petroleum geologist M. King Hubbert .
In formulating his theory, Hubbert took the physical structure of the fossil fuel
system into account and assumed that the total amount of oil and gas in the United
States (i.e., the amount of oil and gas "in place"), and hence the "ultimately
recoverable" amount of oil and gas in the United States, is finite . As a result,
according to Hubbert, the cumulative production of domestic oil and gas must be
less than or equal to the ultimately recoverable amount of oil and gas in the United
States .
Figure 1 is a system dynamics stock-flow structure that represents Hubberts
theory. The most important features of the structure are that (1) there is no
inflow to the Ultimately_Recoverable stock (i.e., there is a fixed stock of oil and
gas), and (2) the resource is being produced and consumed at an exponential rate.

16

Figure 1: Stock-Flow Structure Representing Hubberts View of Oil and Gas Discovery and Production

A direct implication of Hubberts theory is that a time series graph of either oil or
gas production (at either the world-wide or domestic levels) must, at a minimum,
be "hump" shaped. That is, the area beneath the production curve for oil or gas is
the cumulative production of the resource, and the cumulative production of the
resource must be a finite number. In fact, Hubbert argued that the life cycle of oil
and gas discovery and production yields a bell-shaped production curve, which
describes a period of low resource price and exponential growth in production, a
peaking of production as the effects of resource depletion cause discoveries per
foot of exploratory drilling to drop and resource price to rise, and a long period of
rising costs and declining production as the substitution to alternative resources
proceeds. Figure 2 shows a graphical representation of Hubberts life cycle theory
of oil and gas discovery and production.

Figure 2: M. King Hubberts Life Cycle Theory of Oil and Gas Discovery and Production

Before proceeding, it is important to note that Hubberts view of natural resource

discovery and production is not shared by all energy analysts. For example, Morris
Adelman, a world-renowned resource economist (emeritus) at the Massachusetts
Institute of Technology, believes that there is no fixed stock of oil. Indeed,

17

Adelmans views vis--vis oil price and depletion were summarized in a 1991
column by Boston Globe reporter David Warsh:
The price of oil is a study in monopoly, nothing more. The question of mineral
depletion doesnt really enter into it...[I]n fact, there is no fixed stock of oil, says
Adelman; there is only an inventory we call reserves, which we replenish with
new prospecting and lifting techniques. What we dont choose to find or lift
remains a secret of the earth, unknown, probably unknowable, surely unimportant;
a geological fact of no economic interest. In the endless tug of war between
diminishing returns and increasing knowledge, he says, technology wins out...
[The] worldwide stability of the development cost of new oil since 1955 shows that
oil is no more scarce today than it was then. The great shortage is like the horizon,
always receding as you go toward it, says Adelman. Whats left are the
monopolistic political high-jinks .

Figure 3: Stock-Flow Structure Representing Adelmans View of Oil and Gas Discovery and Production

Figure 3 is a system dynamics stock-flow structure representing Adelmans view of

oil and gas discovery and production. It is directly comparable to Figure 1. Two
things about the figure are important to note. First, the cloud-like icon on the left
side of the figure indicates that there is no limitto oil or gas discovery (i.e., there
is no fixed stock of oil or gas). Second, two influences are battling each other for
control of the Discovery_Rate: technological change and diminishing returns.
Historically, technology has always defeated diminishing returns and Adelman, as
well as many energy analysts, feels it will continue to do so.
Naill's Master's Thesis
The results of Roger Naills Masters thesis study confirmed Hubberts life cycle
hypothesis. Indeed, Naill concluded that the production of US domestic natural
gas, which peaked in 1973, will continue to decline well below the US natural gas
discovery rate until depletion halts all domestic production sometime in the late
twentieth or early twenty-first century.
The results of Naills work brought to the forefront the following question among
the system dynamicists who were working on energy modeling problems under the
umbrella of the world modeling programs: Will US economic growth be impeded
by an energy limit similar to those suggested in the Limits to Growth? To begin
18

answering this question, in 1972 the Resource Policy Group at Dartmouth College
received a three year contract from the National Science Foundation to study the
United States "energy transition problem."
The US Energy Transition Problem
The "energy transition problem" refers to the set of disruptions that the US
economy must go through as it reduces its dependence on domestic gas and oil
(due to depletion) and increases its reliance on new sources of energy. Historically,
the US economy has gone through two energy transitions: (1) from wood to coal
during the late 1800s, and (2) from coal to oil and gas during the early 1900s. But,
these transitions were motivated by the availability of abundant new energy
sources that were cheaper and more productive than the existing sources. The
energy transition that the US is currently facing, however, is being forced by
depletion and rising production costs, and not by a cheaper and more productive
energy source .
The implications of the energy transition problem for the United States are quite
significant. The continued growth in US energy demand, coupled with the
depletion of domestic oil and gas resources and long delays in the development of
alternative domestic energy sources is causing a widening domestic energy gap
(domestic energy demand - domestic energy supply). This gap can only be filled, in
the near term at least, through increased dependence on foreign imports of natural
gas and oil. In addition, as long as abundant oil and gas imports are available at
prices that are low relative to the marginal cost of developing new domestic
supplies (i.e., as long as its easier to import oil and gas than it is to develop new
domestic energy sources), US oil and gas depletion will continue, if not accelerate .
The COAL1, COAL2 and FOSSIL1 Models
Roger Naills natural gas model represented the US gas system at a very aggregate
level. The model was not broken down by region, technology, or type of gas. It did
not allow for the substitution of fuels nor for endogenous technological change.
Thus, although it helped to motivate the study of the US energy transition problem,
it was inadequate for the study itself. A new, expanded, model was required.
For his Ph.D. dissertation at Dartmouth, again under the supervision of Dennis
Meadows, Naill expanded the boundary of his natural gas model to include all
major US energy sources (energy supply), as well as US energy consumption
(energy demand) . He called his dissertation model COAL1, because his analysis
showed that the best fuel for the US to rely on during the energy transition was
coal .
After he had completed his Ph.D., Naill worked with the Dartmouth Resource
Policy Group to improve and extend COAL1 as part of the Groups National
19

Science Foundation grant activities. The improved and extended version of the
model was called COAL2 . In 1975, the Energy Research and Development
Administration (which later became the US Department of Energy) provided
support to further improve and extend COAL2 for use in government energy
planning. This improved and extended model was called FOSSIL1, since it looked
at the transition of an economy that is powered by fossil fuels (i.e., by oil, gas, and
coal) to one that is powered by alternative energy sources.
The FOSSIL1 model (as were its predecessors) was thus based on Hubberts theory
of resource abundance, depletion, and substitution, and used to analyze and design
new legislation that would enable the US economy to pass through the energy
transition smoothly. It consisted of four main sectors: (1) energy demand, (2) oil
and gas, (3) coal, and (4) electricity, and addressed, among others things, the
following questions:
o Is energy independence for the US feasible and, if so, when?
o Should a national energy strategy emphasize conservation or increased
supply?
o Which transition energy source should be accelerated?
The results from using FOSSIL1 to analyze the energy transition questions were
that:
o Due to the momentum of past energy policies and the inherent delays before
new policies become effective, in the short term the US energy problem
cannot be solved.
o Neither supply side nor demand side policies alone will ameliorate the
transition problem sufficiently.
o Smoothly passing through the energy transition requires policies
that both stabilize energy demand and increase alternative energy supplies.
The FOSSIL2 and IDEAS Models
In response to the United States first energy crisis in 1977, the Carter
Administration created the first National Energy Plan. Shortly thereafter, the US
House of Representatives asked the Dartmouth Resource Policy Group to evaluate
the Plan using the FOSSIL1 model. After the evaluation of the Plan was
completed, Roger Naill left the Resource Policy Group to head the Office of
Analytical Services at the Department of Energy and, among other things, prepare
energy projections in support of future National Energy Plans.

20

To prepare the energy projections for future National Energy Plans, Naill
implemented FOSSIL1 in-house at the Department of Energy and supervised a
team that extensively modified it so that national energy policy issues could be
analyzed. The modified version of FOSSIL1 was called FOSSIL2 .
From the late 1970s to the early 1990s, the FOSSIL2 model was used at the
Department of Energy to analyze, among other things:
o the net effect of supply side initiatives (including price deregulation) on US
oil imports.
o the US vulnerability to oil supply disruptions due to political unrest in the
Middle East or the doubling of oil prices.
o policies aimed at stimulating US synfuel production.
o the effects of tax initiatives (carbon, BTU, gasoline, oil import fees) on the
US energy system.
o the effects of the Cooper-Synar CO2 Offsets Bill on the US energy system.
In 1989, the Congress directed DOE to conduct a study of energy technology and
policy options aimed at mitigating greenhouse gas emissions. FOSSIL2 was used
for this purpose. Some preliminary conclusions from the study were that:
o Reforestation is a promising alternative to taxes or standards.
o Effectively promoting cost-effective conservation measures would be
worthwhile.
o There needs to be a significant long-term switch from coal to advanced
nuclear power and renewables (environmentally benign) in the US electric
power sector.
o Due to compensating feedbacks in the US energy system, a combination of
policies, rather than any single policy, is going to be necessary to
successfully combat the global warming problem.
o Policy makers should not aim policy changes at a single sector of the US
energy system because this approach ignores the ramifications of the policy
changes in other sectors of the US energy system .
In recent years, extensive improvements have been made to FOSSIL2s
transportation and electric utilities sectors . The improved version of FOSSIL2 has
been renamed IDEAS, which stands for Integrated Dynamic Energy Analysis
21

Simulation. The IDEAS model is now maintained for the DOE by Applied Energy
Services of Arlington, Virginia .
Sterman's Model of Energy-Economy Interactions
During the late 1970s John Sterman, an MIT Ph.D. student and former Dartmouth
College undergraduate, was hired by Roger Naill to work with a team to modify
and extend the FOSSIL1 model into the FOSSIL2 model. During this work,
Sterman came to realize that the FOSSIL2 model ignored important feedbacks and
interactions between the energy sector of the economy and the economy itself. For
his Ph.D. dissertation, Sterman built a system dynamics energy model that
captured, for the first time, significant energy-economy interactions .
To be more precise, Sterman noticed that in the COAL-FOSSIL-IDEAS family of
models, the energy sector is modeled in isolation from the rest of the economy.
That is:
o GDP is exogenous to the model. It is not affected by the price or availability
of energy.
o Costs of unconventional energy technologies are exogenous to the model.
o Investment in energy is unconstrained by the investment needs of other
sectors of the economy.
o Interest rates are exogenous to the model.
o Inflation is unaffected by domestic energy prices, production, or policies.
o World oil prices are unaffected by domestic energy prices, production, or
policies .
Sterman addressed these deficiencies through his modeling and found that:
o The economic consequences of depletion are much more severe during the
transition period (extending to approximately 2030) than during the long run
or equilibrium state.
o The magnitude of the economic effects are substantial in absolute terms and
include reductions in economic growth; increased
unemployment;inflationary stress; higher real interest rates;reduced
consumption per capita.

22

o Energy price increases (sudden or gradual) alone cannot produce sustained

inflation. An accompanying increase in the money supply, relative to real
economic activity, is also required (or an increase in the velocity of money).
o The models major behavior modes are remarkably robust -- i.e., insensitive
to parameter variations (uncertainties).
o In the model, a large exise tax on energy coupled with offsetting income tax
reductions caused economic performance to improve; energy prices to fall;
OPEC revenues to fall; short term inflationary pressures to worsen; income
taxes to be reduced only during the transition .
Fiddaman's Model of Economy-Climate Interactions
Building on the work of his teachers, in 1997 Tom Fiddaman submitted his Ph.D.
dissertation on economy-climate interactions to the Sloan School of Management
at MIT . The dissertation included a critique of existing (non system dynamics)
climate-economy models and a new climate-economy system dynamics model
called FREE (Feedback-Rich Energy Economy model). The FREE model
explicitly incorporates the dynamics of oil and gas depletion as a "source
constraint" on the energy-economy system (as do all of its system dynamics
predecessors), as well as the dynamics of a "sink constraint" (i.e., climate change)
on the energy-economy system. The FREE model is the first energy-economy
model of any kind to explicitly examine the impact of a source constraint on
energy-economy interactions.
The FREE model also explores a number of feedback processes (e.g., endogenous
technological change and bounded rational decision making with perception delays
and biases) that have not been previously explored in a climate change context. In
addition, it is constructed so that a particular parameterization will yield the results
found in neoclassical (traditional) climate-economy models.
Estimating the Amount of Oil In-Place
In the early 1980s, system dynamicist George Richardson met a British petroleum
analyst who claimed that the "amount of oil in the world is increasing." Richardson
replied that, although world oil reserves may be increasing, or that the estimate of
the amount of oil in the world may be increasing, the actual amount of oil in the
world (the amount of oil in-place) is decreasing.
Richardson was unable to persuade the British petroleum analyst to change his
mind, so he decided to build a system dynamics model that could demonstrate his
point. He enlisted the assistance of John Sterman, who had recently finished his
dissertation on energy-economy interactions and, as a starting point, turned to M.
King Hubberts research and Roger Naills natural gas model.
23

Richardson and Sterman produced an oil exploration, discovery, and production

model that was similar in spirit to Naills natural gas model, but that also had
important extensions and improvements. More precisely, their model allowed for
endogenous technological change and the substitution of synfuels for oil .
Richardson and Sterman first used their model to run a synthetic data experiment
that addressed the following question: Which method of forecasting the worlds
ultimately recoverable supply of oil is more accurate, M. King Hubberts life cycle
method or the geological analogy method? Since the worlds ultimately
recoverable supply of oil is currently not known, and cannot be known until all of
the worlds oil has been depleted, a synthetic data experiment was required to
answer the question.
The logic of Richardson and Stermans synthetic data experiment was quite simple.
First build a system dynamics model that accurately replicates the exploration,
discovery, and production behavior of the world oil system and assume that it is the
"real world." Second, formally code and add the Hubbert and geologic analogy
methods to the model so that they "watch" the "real world oil system" and create
forecasts of the ultimately recoverable amount of oil in the "world." The results of
the synthetic data experiment were that:
o The model replicated the behavior of the actual world oil system very well.
o The model replicated the actual forecasts produced by the Hubbert and
geologic analogy methods very well.
o Hubberts method was clearly the most accurate.
o over simulated time, the geologic analogy method rose to, and
then overestimated, the ultimately recoverable amount of oil in the world .
The implications of the geologic analogy method significantly overestimating the
ultimately recoverable amount of oil in the world include:
o a possible reduction in oil conservation efforts.
o the probable overestimation of the amount of time available to develop
substitutes for oil and the technologies, institutions and values needed to
create a sustainable energy system.
Sterman and Richardson, with the assistance of system dynamicist Pl Davidsen,
went on to apply their model and synthetic data technique to the question of the
amount of ultimately recoverable oil in the United States . As in the case of world
oil, Hubberts method was judged to be clearly superior and the model was able to
replicate US oil discovery and production data extremely well. Of course, unlike
24

the case of world oil production which has not yet peaked, US domestic oil
production (in the lower 48 states) peaked in 1970. Since Hubbert had forecast in
1956 that US oil production (in the lower 48 states) would peak between the years
1966 and 1971, his forecast is one of the most accurate and remarkable in the
history of energy forecasting . In light of this, Sterman, Richardson and Davidsens
synthetic data experiment for the United States is perhaps best interpreted as
supporting the argument that Hubberts method is the most accurate.
Other System Dynamics Modeling in the Oil and Gas Industry
System dynamics modeling has been used by numerous researchers, outside of the
Naill-to-IDEAS lineage, to examine firm-level and industry-level issues in the oil
and gas industry. Table 1 lists some of the work that has been done. Inspection of
the table reveals that topics such as the behavior of OPEC and world oil markets,
business process re-engineering in an oil and gas producing firm, international
relations stemming from world oil supply and demand relationships, and oil firms
as learning organizations, have been addressed with system dynamics. The Energy
2020 model was developed by George Backus and Jeff Amlin to provide individual
energy firms and state agencies with a multi-fuel energy model. It is similar in
design to the DOEs IDEAS model.

Topic Area

Authors

Hubberts method versus the geologic

analogy method

Sterman and Richardson (1985); Sterman,

Richardson and Davidsen (1988); Davidsen,
Sterman and Richardson (1990)

Hubberts Method applied to Mexico

Duncan (1996a, 1996b)

The behavior of OPEC and world oil

markets

Powell (1990a, 1990b); Morecroft (1992);

Morecroft and van der Heijden (1992)

Business process re-engineering in a

gas and oil producing firm

Genta and Sokol (1993)

25

Shell Oil as a learning organization

De Geus (1988)

Learning about the oil industry from a

management flight simulator

Kreutzer, Kreutzer and Gould (1992); Morecroft

(1992); Morecroft and van der Heijden (1992);
Genta and Sokol (1993)

International relations stemming from

world oil supply and demand
relationships

Choucri (1981)

Multi-fuel energy model for use by

individual firms and state agencies

Ford (1997, pp. 58-59)

Table 1: Some Well-Known System Dynamics Studies in the Oil and Gas Industry

The efforts of oil companies to become "learning organizations" through the use of
"management flight simulators" is a particularly noteworthy use of system
dynamics in energy modeling. In 1990, system dynamicist Peter Senge wrote a
book that outlined a way for organizations to become "learning organizations"
through the use of system dynamics and other tools . A learning organization is
composed of employees who possess a shared, holistic, and systemic vision, and
have the commitment and capacity to continually learn, rather than simply
executing a "plan" put forth by the "grand strategist" at the top of the organization.
One of the principal tools used by learning organizations is the "management flight
simulator." Management flight simulators are computerized learning environments
that invite decision makers to train in a simulator just like a pilot does. The flight
simulator runs an underlying system dynamics model for a number of periods,
pauses, and waits for the decision maker to make a policy change. After the policy
change has been entered, the flight simulator again simulates the model forward in
time, pauses, and waits for the next policy change. After a decision maker has
finished a session in the simulator, he or she is invited to determine why the system
behaved as it did. Once the decision maker ascertains this, he or she is invited to
play again. Of course, after a number of plays the decision makers understanding
of the system should improve and, hopefully, he or she will apply the lessons
learned to an actual organization.
System Dynamics Modeling in the Coal Industry

26

Applications of system dynamics outside of the Naill-to-IDEAS lineage also exist

in the coal industry. As shown in Table 2, system dynamics has been used to study
industry-level problems, mining systems, the dynamics of small surface coal
operations, international mining ownership, and the representation of discrete
events in system dynamics models.

Topic Area

Authors

The dynamics of small surface

coal operations

Kinek and Jambekar (1984a, 1984b, 1983)

Industry-level studies

Zahn (1981); Mendis, Rosenburg and Medville

(1979)

Mining systems

Wolstenholme and Holmes (1985);

Wolstenholme (1983, 1982b, 1981); Schwarz
(1978)

International mining ownership

Wolstenholme (1984)

Representing discrete events in

system dynamics models

Coyle (1985)

Table 2: Some Well-Known System Dynamics Studies in the Coal Industry

System Dynamics Modeling in the Electric Power Industry

One of the studies that followed the world modeling projects, was conducted by
the Dartmouth Resource Policy Group and undertaken in a fashion parallel to
Roger Naills COAL1 study, was Andrew Fords system dynamics analysis of the
future of the US electric power industry . For his Ph.D. dissertation, Ford produced
the ELECTRIC1 model, which was the first in a series of system dynamics electric
utility models known as the EPPAM models . Modified versions of Fords model
and its descendants were also used to build the electricity sectors of the COAL2,
FOSSIL1 and FOSSIL2 models .

27

Since Fords pathbreaking work, system dynamics has been used extensively by
utility managers for strategic planning . Table 1 lists some well-known system
dynamics studies that have addressed problems in the electric power industry,
including: the effects of regulatory policy on utility performance, the "spiral of
impossibility," the effects of external agents on utility performance, the financial
performance of utilities, the effects of energy conservation practices on utility
performance, regional strategic electricity/energy planning, national strategic
electricity/energy planning, electric vehicles, deregulation in the UK electric power
industry, deregulation in the US electric power industry, and river use and its
impact on hydroelectric power.
The system dynamics work on river use and its impact on hydroelectric power is
particularly noteworthy as it involves the use of a management flight simulator in a
public policy context. More precisely, the management flight simulator is designed
to allow ordinary citizens, as well as utility managers and other stakeholders, to
test policies aimed at moving hydroelectric systems in desired directions, while
taking multiple criteria into account.

Topic Area

Authors

Effects of regulatory policy on utility performance Geraghty and Lyneis (1983)

The "spiral of impossibility"

Ford and Youngblood (1983).

Effects of external agents on utility performance

Geraghty and Lyneis (1985)

Financial performance of utilities

Lyneis (1985)

Effects of energy conservation practices on utility

performance

Ford, Bull and Naill (1989); Ford and Bull

(1989); Aslam and Saeed (1995)

Regional strategic electricity/energy planning

Dyner et al. (1990)

National strategic electricity/energy planning

Coyle and Rego (1983); Naill (1977, 1992);

28

Sterman (1981)

Electric vehicles

Khalil and Radzicki (1996); Ford (1996b);

Ford (1995a); Ford (1994)

Deregulation in the UK electric power industry

Bunn and Larsen (1992, 1994, 1995); Bunn,

Larsen and Vlahos (1993); Larsen and Bunn
(1994)

Deregulation in the US electric power industry

Lyneis, Bespolka and Tucker (1994)

River use and its impact on hydroelectric power

Ford (1996a)

Table 3: Some Well-Known System Dynamics Studies in the Electric Power Industry

Summary: Intellectual Lineage of System Dynamics Energy Modeling

Figure 4 presents a diagram of the intellectual lineage of system dynamics energy modeling.
The lineage begins with the first book on system dynamics modeling -- Industrial
Dynamics by Jay W. Forrester . Forresters original work spawned various firm and industrylevel system dynamics energy models and inspired Peter Senge to write the Fifth Discipline.
Senges book has led to the creation of energy-related management flight simulators and
several attempts at turning energy companies into learning organizations.
Forrester was also responsible for creating the WORLD2 model and initiating the world
modeling projects at MIT. The world models, along with M. King Hubberts work on oil and
gas discovery and production, stimulated the creation of Roger Naills natural gas model, his
COAL1 model, and the improvements to COAL1 that have culminated in the IDEAS model
and its offshoots (FOSSIL79 and DEMAND81). Naill and Hubberts work formed the basis
for Sterman, Richardson and Davidsens synthetic data experiments on analyzing techniques
for forecasting the ultimately recoverable amount of oil in the world and in the United States,
while knowledge of the weaknesses in the FOSSIL2 model caused Sterman to investigate the
dynamics of energy-economy interactions during the energy transition. Fiddamans
recognition that, although the source constraints on the energy-economy system had been
investigated by energy modelers, sink constraints had not, lead to the creation of the FREE
model. The world modeling projects also stimulated the study of the US electric power
industry by Andrew Ford and the subsequent EPPAM models and their offshoots.

29

As we see from the brief history of system dynamics presented in Chapter 1,

much of the emphasis of system dynamics centers around the use of models
and modeling techniques to study complex policy issues. As we proceed to
outline system dynamics concepts, it is important that we step back briefly to
consider the question, Why model at all? From observation, we know that
modeling is something that all human beings do, and for a variety of reasons.
However, the importance of understanding the distinction and application of
models is less obvious. In this chapter, we continue to outline the basic premise
and philosophy of system dynamics by addressing this fundamental question.

Why Build Models in the First Place?

Given that the stated goal of this online book is to teach basic system dynamics concepts and
modeling techniques, it is legitimate to step back and ask: Why build models in the first
place? Are there some advantages to be gained from the creation of system dynamics
models? In general what, if anything, is to be gained from the creation of models?

30

Formal Models
Modeling is something that all human beings do. Children create models out of playdough,
tinker toys, legos, blocks, cards, sand, and the like. Engineers create clay models of
automobiles, metal models of aircraft, wooden models of bridges, plastic models of cities,
hand-drawn models of buildings, and computer models of most of the things they create.
Natural scientists create physical models of molecules, the human body, and the solar system,
and mathematical and/or written models of the evolution of the universe. Social scientists
create computer and written models of the mind, mathematical and computer models of the
economy, and physical models of ancient civilizations. Managers build financial models with
spreadsheet programs and database applications. Playwrights create models capturing aspects
of the human condition.
Humans create models for a variety of reasons. Models are simplifications of reality and
(usually) help people to clarify their thinking and improve their understanding of the world.
Models can be used for experimentation. A computer model, for instance, can compress time
and space and allow many system changes to be tested in a fraction of the time it would take
to test them in the real world. Further, testing changes on a model, rather than on an actual
system, is a good way to avoid "shooting yourself in the foot." That is, if a change does not
perform well in a model of a system, it is questionable as to whether it will perform well in
the actual system itself. In addition, experimenting on a model can avoid causing harm to an
actual system, even when the change being tested is successful. For example, testing a more
effective sprinkler system design does not require setting an actual building on fire, if the
testing is done on a model of the building.

Mental Models
Although it is perhaps self-evident that humans regularly create and use formal models, it is
less obvious that they regularly create and use informal models, or mental models. More
precisely, human beings do not have actual families, clubs, churches, universities,
corporations, cities, states, national socioeconomic systems, and the like, inside of their
heads, but rather mental representations of these systems. Thus, in the field of system
dynamics it is argued that policy makers should not worry about whether or not to use a
31

model, but rather which model to use . In other words, system dynamicists believe that policy
makers should decide whether they wish to make decisions based on results obtained from
their unaided mental models, or from results obtained from some combination of formal and
mental models.
Both formal models and mental models have many strengths and weaknesses . Mental
models are flexible, rich in detail, and constructed from the most abundant and valuable
source of information in the world - experience "data" collected in your brain. John Sterman,
a prominent system dynamics professor at Massachusetts Institute of Technology, points out
that the "great systems of philosophy, politics, and literature are, in a sense, mental models" .
To illustrate the importance of mental models, it is useful to consider the following thought
experiment . Imagine that spacemen land in Detroit, remove every worker from one of the
city's automobile plants, and replace them with workers who are identical in every way to the
removed workers, except that they have no mental information to guide them in making
automobiles. Could the new workers build automobiles by using the available written and
numerical information? The answer is "no," and the reason is that an overwhelming majority
of the information that is crucial for automobile manufacturing is contained in the minds of
the removed workers.
Although mental models have many strengths, they also have many weaknesses. Mental
models are often fuzzy, incomplete, imprecise, and filled with unstated assumptions and
goals. During conversation and debate, different people use different mental models, and
these models can and do change -- even during the course of a single conversation or debate .
Further, the human mind is a poor dynamic simulator. Cognitive limitations prevent humans
from accurately thinking through the dynamic behavior inherent in all but the simplest of
their mental models .
To illustrate the richness and complexity of human mental models and the difficulty of
thinking through their dynamic consequences, it is useful to examine Douglas Hofstadter's
book Gdel, Escher, Bach: An Eternal Golden Braid . In his book, Hofstadter integrates
Gdel's Incompleteness Theorem, the music of Johann Sebastian Bach, and the art of Maurits
Cornelis Escher, to address the issue of whether machine reasoning and artificial intelligence
are truly possible. Hofstadter's self-made sketch of a portion of his mental model that
underlies his book is presented in Figure 1.
(click
on
image
to
see
detailed
view)

Figure 1: Hofstadter's self-made sketch of a portion of his mental model

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After examining Hofstadter's sketch, it is perhaps easier to accept the argument that trying to
accurately think through the dynamic behavior inherent in mental models is a difficult task
indeed!

Combining Mental Models with System Dynamics

The solution to the "mental model problem," according to system dynamicists, is to have
decision makers map-out their mental models on the computer via system dynamics, and let
the machine trace through the inherent dynamics. Then, through interaction with the
computer, decision makers can improve their mental models and learn about the system they
are trying to understand and control. Indeed, in system dynamics modeling, the process of
modeling is seen as being more valuable than the
model itself .
In system dynamics modeling it is also typical to take a
model that is insightful and turn it into a game
or management flight simulator. The argument for
doing this is that a decision maker should train in a
simulator just like a pilot does and, in doing so, greatly
improve his or her mental model of the system he or
she is trying to understand and control. Creating an
effective system dynamics game from an insightful
system dynamics model is a nontrivial task and a
research area in and of itself.

System dynamics provides the basic building blocks necessary to construct models that teach us how
and why complex real-world systems behave the way they do over time. For us, the goal is to
leverage this added understanding to design and implement more efficient and effective policies.
This chapter introduces the concept of time paths and how to begin looking at the world in terms of
changing patterns over time rather than as static snap-shot events. This chapter also introduces the

concept of system stocks, system flows, and system feedback. To understand the dynamic
behavior of a system, its key physical and information stocks, flows and feedback
structures must be identified.

Taking A Dynamic Perspective

33

System dynamics is concerned with the behavior of a

system over time. A critical step in examining a system
or issue is to identify its key patterns of behavior what we often refer to as "time paths." In this section,
we examine the meaning of a time pathand consider the general types commonly found in dynamic
systems. To provide a "real life" grounding to this discussion, several time path examples reproduced
from books, newspapers, and magazines are presented.

Time Paths
System dynamics modeling is concerned with the dynamic behavior of systems - that is, the
behavior of systems over time. In system dynamics modeling, the modeler attempts to
identify the patterns of behavior being exhibited by important system variables, and then
build a model that can mimic the patterns. Once a model has this capability, it can be used as
a laboratory for testing policies aimed at altering a system's behavior in desired ways.
Figure 1 is a straight line with a positive slope and an example of a dynamic time path.
Although actual systems can exhibit a variety of time paths (often simultaneously), the good
news is that the number of distinct time path "families" that exists is relatively small.

Figure 1: Example of time path

Figures 2 through 5 present a collection of fifteen distinct time paths which occur frequently
in the real world. These paths have been grouped into five distinct families, one of which is
shown in each of the figures. Other, more complicated, time paths are observable, but they
are almost always combinations of the paths presented here.
Linear Family
The first identifiable family of time paths is the linear family, which is presented in Figure 2.
The linear family of paths includes equilibrium, linear growth, and linear decline. Given the
34

simplicity and intuitive appeal of these paths, it is important to point out some facts which
can place them in the proper perspective, vis--vis system dynamics modeling.

Figure 2: Linear Family of Time Paths

The first thing to note is that the average person, not trained in dynamic modeling, tends to
think that actual systems grow or decline in a linear fashion - that is, as shown in second and
third time paths of Figure 2.The truth, however, is that most systems do not grow and decline
along linear time paths, but rather along exponential time paths (as shown in Figure 3) . Pure
linear time paths are usually generated by systems devoid of feedback - a crucial building
block of both actual systems and system dynamics models.
A second thing to note is that the equilibrium time path presented in Figure 2 is a dynamic
behavior that few actual systems exhibit. It is a state of perfect balance in which there are no
pressures for change. In fact, from a system dynamics point of view, equilibrium implies that
all of a system's state variables reach their desired values simultaneously - a very artificial
situation . Curiously, much of modern economics and management science uses models
based on the concept of equilibrium . System dynamicists, on the other hand, believe that the
most interesting system behaviors (i.e., problems) are disequilibrium behaviors and that the
most effective system dynamics models exhibit disequilibrium time paths. This is not to say,
however, that the concept of equilibrium is useless. On the contrary, system dynamics models
are often placed in an initial state of equilibrium to study their "pure" response behavior to
policy shocks .

Exponential Family
The second distinct family of time paths is the exponential family, shown in Figure 3. The
exponential family consists of exponential growth and exponential decay. As previously
mentioned, real systems tend to grow and decline along exponential time paths, as opposed to
linear time paths.

35

Figure 3: Exponential Family of Time Paths

Goal-seeking Family
The third distinct family of time paths is the goal-seeking family as shown in Figure 4. All
living systems (and many nonliving systems) exhibit goal-seeking behavior. Goal-seeking
behavior is related to exponential decay. This can be seen by comparing the second time path
in Figure 3 with the second time path in Figure 4. The only difference between the two is that
in Figure 3, the time path is seeking a goal of zero, whereas in Figure 4, the time path is
seeking a nonzero goal.

Figure 4: Goal Seeking Family of Time Paths

Oscillation Family
The fourth distinct family of time paths is the oscillation family. Oscillation is one of the
most common dynamic behaviors in the world and is characterized by many distinct patterns.
Four of these distinct patterns are shown in Figure 5: sustained, damped,
exploding, and chaos.

36

Figure 5: Oscillating Family of Time Paths

Oscillations that are sustained can have periodicities (the number of peaks that occur before
the cycle repeats) of any number. Sustained oscillations are characterized by a periodicity of
one. Damped oscillations are exhibited by systems that utilize dissipation or relaxation
processes. Examples of dissipation or relaxation processes include friction in physical
systems and information smoothing in social systems. Exploding oscillations either grow
until they settle down into a sustained pattern or grow until the system is torn apart. . As a
result, exploding oscillations usually do not occur very frequently in the real world, nor last
very long when they do. Chaotic behavior is an oscillatory time path that unfolds irregularly
and never repeats (i.e., its period is essentially infinite). Chaos is a unique type of time path
because it is an essentially random pattern that is generated by a system devoid of
randomness .

S-shaped Family
The fifth distinct family of time paths is the s-shaped family, shown in Figure 6. Close
inspection of the s-shaped growth time path pattern reveals that it is really a combination of
two time paths - exponential growth and goal-seeking behavior. More precisely, in the case of
s-shaped growth, exponential growth gives way to goal-seeking behavior as the system
approaches its limit or carrying capacity (indicated by the green line).

Figure 6: S-Shaped Family of Time Paths

37

Sometimes, however, a system can overshoot its carrying capacity. If this occurs and the
system's carrying capacity is not completely destroyed, the system tends to oscillate around
its carrying capacity. On the other hand, if the system overshoots and its carrying capacity is
damaged, the system will eventually collapse. This is referred to as an "overshoot and
collapse" system response. A third possible outcome from an overshoot event is that a system
will simply reverse direction and approach the system capacity in a reverse s-shaped pattern.
As with a "normal" s-shaped pattern, a reverse s-shaped pattern is a combination of two time
paths -- exponential decay and a self-reinforcing spiral of decline.

Actual Data
A story that is frequently recounted by Jay Forrester is that a student once told him that he
"learned to read the newspaper differently," after taking a class in system dynamics. Although
it is possible to interpret the student's comment in a number of ways, one can speculate that,
among other things, he began to see the graphs of actual time series data, presented in the
media, in a different light after studying system dynamics.
Figures 1 through 10 present graphs of a variety of actual time series data reproduced from
books, newspapers, and magazines, which appeared during the last few years. An
examination of the figures reveals that it is possible to identify, in actual data, many of the
time paths shown in the previous section.
Figure 1, for example, is a graph of actual Medicare costs from 1967 to 1994 and Medicare
costs from 1967 to 1994 as projected in 1965. Two things about this graph are noteworthy.
The first is that Medicare costs were projected to grow linearly from 1967 to 1994 -- a
common mistake among persons not familiar with the dynamics of systems. The second is
that actual Medicare costs grew exponentially from 1967 to 1994. This time path is clearly a
member of the exponential family of time paths.

Figure 1: Actual and Projected Medicare costs from 1967 to 1994

38

Figure 2 is a graph of the number of cases of the measles reported in

the United States from 1960 to 1993. The time shape exhibited by
these data is clearly exponential decay.

Figure 2: Measle cases from

1960 through 1993
Figure 3 below is a graph of National Basketball Association attendance during the years
1988 to 1993 and Figure 4 is a graph of the average U.S. selling price of a 486 desktop
computer. These data are clearly following non-zero goal-seeking time paths.

Figure 3: National Basketball Association attendance from 19988 through 1993

Figure 4: Average U.S. selling price of a 486 desktop computer.

39

Figure 5 is a graph of the number of lynx trapped in Canada (in log form) from 1821 to 1933.
Although slightly "noisy" or choppy, the time path can certainly be classified as a sustained
oscillation.

Figure 5: Lynx trapped in Canada (in log form) from 1821 to 1933.
Figure 6 is a graph of Norwegian pulp inventory, production, and sales, for the years 1957 to
1978. Clearly, the time path of pulp inventory is an exploding oscillation .

Figure 6: Norwegian pulp inventory, production, and sales, for the years 1957 to
1978.
Figure 7 is a time series graph of the number of third class mail pieces (in billions) delivered
by the United States Postal Service, during the years 1981 to 1991. The path is clearly sshaped.

40

Figure 7: Number of third class mail pieces (in billions) delivered by US Postal
Service, 1981 to 1991.
Figure 8 is a time series graph of materials consumption in the United States for the years
1900 to 1992. Although a bit noisy, the data exhibit an overshoot and oscillate time path.

Figure 8: Materials consumption in the US from 1900 to 1992.

Figure 9 presents a time series graph of United States bank, savings and loan, and total
financial institution, failures, during the years 1980 to 1992. All three series exhibit an
overshoot and collapse time path.

41

Figure 9: United States bank, saving and loan, and total financial institution
failures, 1980 to 1992.
Figure 10 is a graph of grainland in Japan for the years 1950 to 1994. The time path exhibited
by this data is clearly a reverse s-shape.

Figure 10: Grainland in Japan, 1950 to 1994.

The general conclusion that the reader should draw from these graphs is that real systems
often generate clearly identifiable time patterns and that system dynamic models can be built
to mimic the patterns.

42

Seeing System Structure

In the previous section, we defined the concept of time
paths and considered how these system behavioral
patterns can be placed into one or a combination of five
distinct categories. Now, we consider the source of these
characteristic patterns. Specifically, we discuss the
concept of cumulative (stock) and rate-of-change (flow)
system variables. As the elemental building blocks of
system feedback networks, "stocks" and "flows" virtually
ensure that a dynamic system will behave in a difficult-tounderstand or counterintuitive way. In addition, the role of
nonlinear relationships in determining a system's limits, the strength or dominance of its feedback
loops, and the complexity of its behavior,will be discussed.

Stocks and Flows

In system dynamics modeling, dynamic behavior is thought to arise due to
the Principle of Accumulation. More precisely, this principle states that all dynamic
behavior in the world occurs when flows accumulate in stocks.

Figure 1: Example of a simple stock and flow structure

In terms of a metaphor, a stock can be thought of as a bathtub and a flow can be thought of as
a faucet and pipe assembly that fills or drains the stock as shown in Figure 1. The stock-flow
structure is the simplest dynamical system in the world. According to the principle of
accumulation, dynamic behavior arises when something flows through the pipe and faucet
assembly and collects or accumulates in the stock. In system dynamics modeling,both
informational and noninformational entities can move through flows and accumulate in
stocks.
Figure 2 is an example of a system dynamics stock and flow structure that has two flows -- an
inflow and an outflow. In this case, the dynamic behavior of the system arises due to the
flows into, and out of, the stock (the inflow minus the outflow). Clearly, if the inflow exceeds
the outflow the number of entities in the stock will increase. If the outflow exceeds the
inflow, on the other hand, the number of entities in the stock will decrease. Finally, if the
43

outflow equals the inflow, the number of entities in the stock will remain the same. This last

possibility describes a state of dynamic equilibrium in a system dynamics model.

Figure 2: Example stock and flow structure with an inflow and outflow
In principle, a stock can have any number of inflows and outflows. In practice, however, a
system dynamics model usually contains stocks with no more than four-to-six inflows and/or
outflows. The principle of accumulation holds regardless of the number of inflows and
outflows that work to change the number of entities accumulating in a stock.

Identifying Stocks and Flows

One of the fundamental skills a system dynamics modeler must learn is how to
identify the stocks and flows in the system experiencing the problem that he or she
is trying to model. This is a nontrivial task and one that people often find difficult.
For example, it is not at all unusual for people, not trained in system dynamics modeling, to
confuse stocks and flows. They'll say "deficit" (a flow) when they mean "debt" (a stock), or
they'll say that "inflation (a flow into a stock) is lower so therefore the general level of prices
(a stock) is falling" In fact, decreasing inflation to a lower value means that prices are rising
but at a slower rate.
In order to identify stocks and flows, a system dynamics modeler must determine which
variables in the system experiencing the problem define its state (its stocks), and which
variables define the changes in its state (its flows). That said, the following guidelines can be
used to help identify stocks and flows:
o Stocks usually represent nouns and flows usually represent verbs.
o Stocks do not disappear if time is (hypothetically) stopped (i.e., if a snapshot were
taken of the system); Flows do disappear if time is (hypothetically) stopped.
o Stocks send out signals (information about the state of the system) to the rest of the
system.

Four Characteristics of Stocks

Stocks possess four characteristics that are crucial in determining the dynamic behavior of
systems. More specifically, stocks:
o Have memory,
o Change the time shape of flows,
44

o Decouple flows,

o Create delays.
Each of these characteristics will be discussed in turn.
Stocks have memory
The first key characteristic of stocks is that they have memory (i.e., persistence or inertia). An
easy way to see this is to recall the simple stock-flow structure presented in Figure 1. If the
inflow to the stock is shut-off, the number of entities in the stock will not decrease, but rather
stay at the level it is at when the inflow stops. An outflow in excess of the inflow is required
to decrease the number of entities in the stock. The importance of this characteristic should
not be underestimated. This is because people often believe that shutting-off an inflow to a
stock will cure a problem being created by the number of entities in the stock. Regrettably,
nothing could be further from the truth.

Figure 3: US federal budget deficit, 1930 - 1993.

Consider the problem that the United States is currently having with its federal
deficit and debt. Figure 3 presents a time series graph of the U.S. federal deficit and Figure 4
presents a time series graph of the U.S. federal debt. The deficit is the yearly amount that the
U.S. federal government spends in excess of its revenues, while the debt is the accumulation
of all the previous deficits (less the debt that has been retired). From an inspection of these
figures, it is clear that both the U.S. federal deficit and the U.S. federal debt are growing

exponentially.

45

Figure 4: US Federal Debt from 1930 - 1993.

In terms of a simple system dynamics model, the deficit is a flow and the debt is a stock, as
shown in Figure 5 . Therefore, if the U.S. federal government were to balance its budget (i.e.,
make the deficit inflow zero), the debt would not decrease at all. This fact is surprising to
many people!

Figure 5: Structure of US Debt/Deficit problem.

A similar case involves the depletion of the earth's ozone layer. In 1990 the nations of the
world agreed to a ban on the production (and hence on the eventual release into the
atmosphere) of ozone-killing chlorofluorocarbons (CFC's).

Figure 6: System dynamics structure of CFC accumulation in atmosphere.

From a system dynamics point of view, this agreement caused the flow of
chlorofluorocarbons into the atmosphere to stop, but did nothing to remove any of the
chlorofluorocarbons already in the atmosphere and destroying ozone (a stock -- see Figure 6).
The removal of these pollutants can only be accomplished via the earth's natural cleansing
processes .

Stocks Change the Time Shape of Flows

46

A second important characteristic of stocks is that they (i.e., the accumulation process)
usually change the time shape of flows . This can be seen by simulating the simple stockflow structure shown in Figure 1, with different time shapes for the flow. Figure 7 for
example, presents the time shape of the stock when the flow is at a constant level of 5
units/time. An examination of the figure reveals that the accumulation process changes the
horizontal time shape of the flow into a linear growth shape for the stock .
(Click on image to see animation)

In a similar way, Figure 8 through Figure 13 show the time shape of the stock for
different time shapes exhibited by the flow.
(Click on image to see animation)

In Figure 8, we see that if the inflow valve is "opened" or increases in a linear

fashion, (i.e., a linear growth shape that is at all times positive), the "level" of the
stock variable will grow at an increasing rate.

47

(Click on image to see animation)

Figure 9 shows that a linear decline shape for the inflow, which is at all times positive, causes
the stock to grow at a decreasing rate. Recall the example above in which a decrease in
inflation reduced the rate of increase in price. In this case, price would be analogous to the
stock variable and rate of inflation would be the analogous to the inflow variable.
(Click on image to see animation)

In figure 10, we see a case in which the inflow (valve) is at all time negative. This is
equivalent to saying that the inflow valve is "drawing down the level" (i.e., it's a drain). In
this case, the time path for the inflow valve is at all times negative and is declining linearly.
This causes the stock to decline at an increasing rate. .

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(Click on image to see animation)

The case shown in Figure 11 is similar to that of Figure 10 in that the inflow valve is always
negative, indicating that the stock is being drawn down. However, in this case the flow valve
is closing, i.e., becoming less negative. As show in the figure, a linear growth shape for the
flow, which is at all times negative, causes the stock to decrease at a decreasing rate.
(Click on image to see animation)

Figure 12 illustrates case in which "shape" of the inflow time path is not changed by the
accumulation process . In this case, an inflow that increases exponentially causes the stock
(the accumulation ) to increase in a similar fashion . In terms of real-world stock and flow
data, the National deficit and debt data shown in Figure 3 and Figure 4 illustrate this case.

49

(Click on image to see animation)

In Figure 13, we see the result of having the inflow oscillating in a sinusoidal manner
between a value of 1 and -1, i.e., the stock is being filled and drained repeatedly. As one
would expect, the stock mimics the inflow's time path character (as in Figure 12). It is
important to note, however, that maximum value of the stock is reached after the inflow's
maximum .

Stocks decouple flows

A third important characteristic of stocks is that they "decouple" or interrupt flows. A stock
thus makes it possible for an inflow to be different from an outflow and hence for
disequilibrium behavior to occur . In addition, the decoupling of flows by stocks makes it
possible for inflows to be controlled by sources of information that differ from those
controlling outflows. Figure 14 shows a number of examples in which flows are decoupled
by stocks.

Figure 14: Examples where flows are decoupled by stocks

Stocks create delays

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A fourth important characteristic of stocks is that they create delays. This can be seen by reexamining Figure 13 -- the response of a stock to a sinusoidal inflow. In this example, it is
clear that the stock reaches each of its peaks and troughs after the flow reaches each of its
corresponding peaks and troughs, during each repetition of the cycle. Henri Bergson once
remarked that "time is a device that prevents everything from happening at once" . Bergson's
point of course is that, despite human impatience, events in the world do not occur
instantaneously. Instead, there is often a significant lag between cause and effect. In system
dynamics modeling, identifying delays is an important step in the modeling process because
they often alter a system's behavior in significant ways. The longer the delay between cause
and effect, the more likely it is that a decision maker will not perceive a connection between
the two. Figure 15 presents some examples of stock-flow structures specifying significant
system delays.

Figure 15: Examples of Stock-Flow Structures Specifying Significant System Delays

Feedback
A lthough stocks and flows are both necessary and sufficient for generating
dynamic behavior, they are not the only building blocks of dynamical systems.
More precisely, the stocks and flows in real world systems are part of feedback
loops, and the feedback loops are often joined together by nonlinear couplings that
often cause counterintuitive behavior.
From a system dynamics point of view, a system can be classified as either "open"
or "closed." Open systems have outputs that respond to, but have no influence
upon, their inputs. Closed systems, on the other hand, have outputs that both
respond to, and influence, their inputs. Closed systems are thus aware of their own
performance and influenced by their past behavior, while open systems are not .
Of the two types of systems that exist in the world, the most prevalent and
important, by far, are closed systems. As shown in Figure 1, the feedback path for a
closed system includes, in sequence, a stock, information about the stock, and a
decision rule that controls the change in the flow . Figure 1 is a direct extension of
the simple stock and flow configuration shown previously with the exception that
an information link added to close the feedback loop. In this case, an information
link "transmits" information back to the flow variable about the state (or "level") of

51

the stock variable. This information is used to make decisions on how to alter the
flow setting.

Figure 1: Simple System Dynamics Stock-Flow-Feedback Loop Structure.

It is important to note that the information about a system's state that is sent out by
a stock is often delayed and/or distorted before it reaches the flow (which closes
the loop and affects the stock). Figure 2, for example, shows a more sophisticated
stock-flow-feedback loop structure in which information about the stock is delayed
in a second stock, representing the decision maker's perception of the stock (i.e.,
Perceived_Stock_Level), before being passed on. The decision maker's perception
is then modified by a bias to form his or her opinion of the stock (i.e.,
Opinion_Of_Stock_Level). Finally, the decision maker's opinion is compared to
his or her desired level of the stock, which, in turn, influences the flow and alters
the stock .
Given the fundamental role of feedback in the control of closed systems then, an
important rule in system dynamics modeling can be stated: Every feedback loop in
a system dynamics model must contain at least one stock. .

52

Figure 2: More Sophisticated Stock-Flow-Feedback Loop Structure

Positive and Negative Loops
Closed systems are controlled by two types of feedback loops: positive loops and
negative loops . Positive loops portray self-reinforcing processes wherein an action
creates a result that generates more of the action, and hence more of the result.
Anything that can be described as a vicious or virtuous circle can be classified as a
positive feedback process. Generally speaking, positive feedback processes
destabilize systems and cause them to "run away" from their current position.
Thus, they are responsible for the growth or decline of systems, although they can
occasionally work to stabilize them .
Negative feedback loops, on the other hand, describe goal-seeking processes that
generate actions aimed at moving a system toward, or keeping a system at, a
desired state. Generally speaking, negative feedback processes stabilize systems,
although they can occasionally destabilize them by causing them to oscillate.
Causal Loop Diagramming
In the field of system dynamics modeling, positive and negative feedback
processes are often described via a simple technique known as causal loop
diagramming. Causal loop diagrams are maps of cause and effect relationships
between individual system variables that, when linked, form closed loops.
53

Figure 3, for example, presents a generic causal loop

diagram. In the figure, the arrows that link each
variable indicate places where a cause and effect
relationship exists, while the plus or minus sign at the
head of each arrow indicates the direction of causality
between the variables when all the other variables
(conceptually) remain constant. More specifically, the
variable at the tail of each arrow in Figure 3 causes a
change in the variable at the head of each arrow, ceteris
paribus, in the same direction (in the case of a plus
sign), or in the opposite direction (in the case of a
minus sign) .

Figure 3: Generic causal loop diagram

The overall polarity of a feedback loop -- that is, whether the loop itself is positive or negative -- in a
causal loop diagram, is indicated by a symbol in its center. A large plus sign indicates a positive
loop; a large minus sign indicates a negative loop. In Figure 3 the loop is positive and defines a self
reinforcing process. This can be seen by tracing through the effect of an imaginary external shock as
it propagates around the loop. For example, if a shock were to suddenly raise Variable A in Figure 3,
Variable B would fall (i.e., move in the opposite direction as Variable A), Variable C would fall (i.e.,
move in the same direction as Variable B), Variable D would rise (i.e., move in the opposite direction
as Variable C), and Variable A would rise even further (i.e., move in the same direction as Variable
D).
By contrast, Figure 4 presents a generic causal loop
diagram of a negative feedback loop structure. If an
external shock were to make Variable A fall,
Variable B would rise (i.e., move in the opposite
direction as Variable A), Variable C would fall (i.e.,
move in the opposite direction as Variable B),
Variable D would rise (i.e., move in the opposite
directionas Variable C), and Variable A would rise
(i.e., move in the same direction as Variable D).
The rise in Variable A after the shock propagates
around the loop, acts to stabilize the system -- i.e.,
move it back towards its state prior to the shock.
The shock is thus counteracted by the system's
response.

Figure 4: Generic causal loop diagram of a

negative feedback loop structure

54

Occasionally, causal loop diagrams are drawn in a

manner slightly different from those shown in
Figure 3 and Figure 4. More specifically, some
system dynamicists prefer to place the letter "S"
(for Same direction) instead of a plus sign at the
head of an arrow that defines a positive
relationship between two variables. The letter "O"
(for Opposite direction) is used instead of a minus
sign at the head of an arrow to define a negative
relationship between two variables. To define the
overall polarity of a loop system dynamicists often
use the letter "R" (for "Reinforcing") or an icon of
a snowball rolling down a hill to indicate a positive Figure 5: Alternative Causal Loop Diagramming
loop. To indicate a negative loop, the letter "B" (for
Conventions
"Balancing"), the letter "C" (for "Counteracting"),
or an icon of a teetertotter is used . Figure 5
illustrates these different causal loop diagramming
conventions.

In order to make the notion of feedback a little more salient, Figure 6 to Figure 17
present a collection of positive and negative loops. As these loops are shown in
isolation (i.e., disconnected from the other parts of the systems to which they
belong), their individual behaviors are not necessarily the same as the overall
behaviors of the systems from which they are taken.
Positive Feedback Examples
Population Growth/Decline: Figure 6
shows the feedback mechanism responsible
for the growth of an elephant herd via
births. In this simple example we consider
two system variables: Elephant Births and
Elephant Population. For a given elephant
herd, we say that if the birth rate of the
herd were to increase, the Elephant
Population would increase. In this same
way, we can say that if - over time - the
Elephant Population of the herd were
to increase, the birth rate of the herd
would increase. Thus, the Elephant Birth
Figure 6: Positive Loop Responsible for the Growth in an Elephant
rate drives the Elephant Population that
Herd via Births
drives Elephant Birth rate - positive
feedback.

55

National Debt: Figure 7 is a positive

loop that shows the growth in the
national debt due to the compounding of
interest payments. First, we note that that
an increase in the amount of interest paid
per year on the national debt (itself a cost
within the federal budget ) will cause the
overall national debt to increase. In this
same way, an increase in the level of
national debt will increase the amount of
the interest paid each year.
Figure 7: Positive Loop Showing Growth in the National Debt Due to
Compounding Interest Payments

Arms Race: Figure 8 shows a generic arms

race between Country A and Country B. In
its simplest form, an "arms race" can be
described as a self-sustaining competition
for military superiority. An arms race is
driven by the perception that one's
adversary has equal or greater military
strength. If Country A moves to increase its
military capability, Country B interprets this
as a threat and responds in-kind with its
own increase in military capability. Country
B's action, in turn, causes Country A to feel
more threatened. Thus, Country A moves to
further increase its military capability.

Figure 8: Arms Race is a Positive Feedback Process.

Bank Panic: A common scene during the

Great Depression in the 1930s was that of a
panic stricken crowd standing outside their
local bank waiting to withdraw what
remained of their savings. Figure 8 shows
the feedback mechanism responsible for the
spiraling decline of the banking system
during this period.
From the diagram, we see that the
frequency of bank failures increases public
concern and the fear of losing their money.
In this case, we say that the two system
variables "move" in the same (S) or positive
(+) direction. The relationship between the
"fear of not being able to withdraw money"
and the rate at which bank withdrawals are

Figure 9: Bank panic is a positive feedback process.

56

made is also positive.

The relationship between withdrawals and bank health is negative (-) or opposite (O). This means
that if the rate of bank withdrawals increases, the health of the bank decreases as capital reserves are
drawn down. The relationship between the banking industry's health and the rate of bank failures is
also negative. This means that if the health of the banking industry increases, the number of bank
failures per year will decrease.
This vicious cycle was clearly seen during the 1930s. An overall economic downturn caused the rate
of bank failures to increase. As more banks failed, the public's fear of not being able to withdraw
their own money increased. This, in turn, prompted many to withdraw their savings from banks,
which further reduced the banking industry's capital reserves. This caused even more banks to fail.

Figure 10 depicts three

interacting positive feedback
loops that are thought to be
responsible for the growth in
students taking drugs in high
school .

Figure 10: Feedback structure responsible for growth high school drug use

Negative Feedback Examples

57

Population Growth/Decline:In Figure 6,

we saw how an elephant population and its
corresponding birth rate form a positive
feedback loop. Now, we consider the other
half of the equation, that is, the feedback
structure between Elephant Population and
Elephant Death rate. Figure 11 shows the
negative feedback process responsible for
the decline of an elephant herd via deaths. If
the Elephant Death rate increases, the
Elephant Population willdecrease. A
negative sign indicates this counteracting
behavior. The causal influence of Elephant
Population to Elephant Death rate is just the
opposite. An increase in the number of
elephants in the herd means that a
proportionally larger number of elephants
will die each year, i.e., an increase in the
herd's death rate. A plus sign indicates this
complimentary behavior. These two
relationships combine together to form a
negative feedback loop.

Figure 11: Elephant population negative feedback loop.

Figure 12 and Figure 13 are two simple and familiar examples of negative feedback processes.
Figure 12 shows the negative feedback process responsible for the dissipation of Itching due to
Scratching. Figure 13 considers the negative feedback involved in Eating to reduce Hunger.
Anincrease in one's Hunger causes a person to eat more food. Increasing in the rate food
consumption, in turn, reduces Hunger.

Figure 12: Scratching an itch and negative feedback

Figure 13: Dissipation of hunger

58

Law Enforcement:Figure 14 depicts a

negative feedback process that maintains a
balance between the number of drug dealers
and the number of police officers in a
neighborhood. An increase in the number of
drug dealers in a neighborhood will prompt
local officials to increase the number of law
enforcement persons as a counter measure.
As the number of police officers increase,
more arrests are made and the number of
drug dealers is reduced.
Figure 14: Neighborhood drug intervention negative feedback

Car Pools:Figure 15 shows a

negative feedback process that
maintains a balance between car pools
and gasoline consumption.
An increase in gasoline
consumption increases gasoline price
(supply reduction). A higher gasoline
price pushes many individual
motorists to join carpools, which
reduces the total number of vehicles
on the road. This, in
turn, reduces gasoline consumption.
Figure 15: Gasoline consumption negative feedback

Implicit and Explicit Goals

The negative feedback loops presented in Figure 11 through Figure 15 are, in a sense,
misleading because the goals they are seeking are implicit rather than explicit. For example,
the implicit goal of the loop in Figure 11 is zero elephants. That is, if the loop were to act, in
isolation, for a substantial period of time, eventually all of the elephants would die and the
population would be zero. The same sort of logic applies to Figure 12 and Figure 13, in
which the loops implicitly seek goals of zero itching and zero hunger respectively.The logic
gets even murkier in the case of Figure 14 and Figure 15. In Figure 14, there is an implicit
goal of an "acceptable" or "tolerable" level of drug dealers in the neighborhood, which may
or may not be zero. In Figure 15, there is an implicit goal of an acceptable or tolerable
gasoline price, which is certainly a lower price rather than a higher price, but is also
(realistically) not zero.

59

Figure 16: Generic negative feedback structure with explicit goal

An alternative and (often) more desirable way to represent negative feedback processes via
causal loop diagrams is by explicitly identifying the goal of each loop. Figure 16, for
example, shows a causal loop diagram of a generic negative feedback structure with an
explicit goal. The logic of this loop says that, any time a discrepancy develops between the
state of the system and the desired state of the system (i.e., goal), corrective action is called
forth that moves the system back into line with its desired state.
A more concrete example of a negative feedback structure with an explicit goal is shown in
Figure 17. In the figure, a distinction is drawn between the actual number of elephants in a
herd and the desired number of elephants in the herd (presumably determined by a knowledge
of the carrying capacity of the environment supporting the elephants). If the actual number of
elephants begins to exceed the desired number, corrective action -- i.e., hunting -- is called
forth. This action reduces the size of the herd and brings it into line with the desired number
of elephants.

Figure 17: Example of negative feedback structure with an explicit goal

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Examples of Interacting "Nests" of Positive and Negative Loops

In system dynamics modeling, causal loop diagrams are often used to display "nests" of
interacting positive and negative feedback loops. This is usually done when a system
dynamicist is attempting to present the basic ideas embodied in a model in a manner that is
easily understood, without having to discuss in detail.
As Figure 18 and Figure 19 show, when causal loop diagrams are used in this fashion, things
can get rather complicated. Figure 18 is a causal loop diagram of a system dynamics model
created to examine issues related to profitability in the paper and pulp industry. This figure

has a number of features that are important to mention. The first is that the authors
have numbered each of the positive and negative loops so that they can be easily
referred to in a verbal or written discussion. The second is that the authors have
taken great care to choose variable names that have a clear sense of direction and have reallife counterparts in the actual system . The last and most important feature is that, although
the figure provides a sweeping overview of the feedback structure that underlies profitability
problems in the paper and pulp industry, it cannot be used to determine the dynamic behavior
of the model (or of the actual system). In other words, it is impossible for someone to
accurately think through, or mentally simulate, the dynamics of the paper and pulp system
from Figure 18 alone.

61

Figure 18: Causal Loop Diagram of a Model Examining Profitability in the Paper
and Pulp Industry
Figure 19 is a causal loop diagram of a system dynamics model created to examine forces
that may be responsible for the growth or decline of life insurance companies in the United
Kingdom. As with Figure 18, a number of this figure's features are worth mentioning. The
first is that the model's negative feedback loops are identified by "C's," which stand for
"Counteracting" loops. The second is that double slashes are used to indicate places where
there is a significant delay between causes (i.e., variables at the tails of arrows) and effects
(i.e., variables at the heads of arrows). This is a common causal loop diagramming
convention in system dynamics. Third, is that thicker lines are used to identify the feedback
loops and links that author wishes the audience to focus on. This is also a common system
dynamics diagramming convention . Last, as with Figure 18, it is clear that a decision maker
would find it impossible to think through the dynamic behavior inherent in the model, from
inspection of Figure 19 alone.

62

Figure 19: Causal Loop Diagram of a Model Examining the Growth or Decline of
a Life Insurance Company .

Archetypes
An area of the field of system dynamics or, more precisely, of the much broader field of
"systems thinking," that has recently received a great deal of attention is archetypes .
Archetypes are generic feedback loop structures, presented via causal loop diagrams, that
seem to describe many situations that frequently appear in public and private sector
organizations. Archetypes are thought to be useful when a decision maker notices that one of
them is at work in his or her organization. Presumably, the decision maker can then attack the
root causes of the problem from an holistic and systemic perspective . Currently, nine
archetypes have been identified and cataloged by systems thinkers, including:
o Balancing Process with Delay,
o Limits to Growth,
o Shifting the Burden,
o Eroding Goals,
o Escalation,
o Success to the Successful,
o Tragedy of the Commons,
63

o Fixes that Fail, and

o Growth and Underinvestment .
Recent efforts, however, have suggested that the number can be reduced to four:
o Growth Intended-Stagnation/Decline Achieved,
o Control Intended-Unwanted Growth Achieved,
o Control Intended-Compromise Achieved, and
o Growth Intended At Expense to Others .
No matter what the true number archetypes is or will be, however, the central question
remains unanswered: How successful are archetypes in helping decision makers solve
problems in their organizations?

Problems with Causal Loop Diagrams

Causal loop diagrams are an important tool in the field of system dynamics modeling. Almost
all system dynamicists use them and many system dynamics software packages support their
creation and display.
Although some system dynamicists use causal loop diagrams for "brainstorming" and model
creation, they are particularly helpful when used to present important ideas from a model that
has already been created . The only potential problem with causal loop diagrams and
archetypes then, occurs when a decision maker tries to use them, in lieu of simulation, to
determine the dynamics of a system .
Causal loop diagrams are inherently weak because they do not distinguish between
information flows and conserved (noninformation) flows. As a result, they can blur direct
causal relationships between flows and stocks. Further, it is impossible, in principle, to
determine the behavior of a system solely from the polarity of its feedback loops, because
stocks and flows create dynamic behavior, not feedback. Finally, since causal loop diagrams
do not reveal a system's parameters, net rates, "hidden loops," or nonlinear relationships, their
usefulness as a tool for predicting and understanding dynamic behavior is further weakened.
The conclusion is that simulation is essential if a decision maker is to gain a complete
understanding of the dynamics of a system .
Nonlinearity
A large part of the system dynamics modeling process involves the application of common
sense to dynamic problems. A good system dynamic modeler is always on the look-out for
model behaviors that do not make sense. Such behaviors usually indicate a flaw in a model,
and the flaw is often that a crucial piece of system structure has been left out of the model.
A common error that novice system dynamicists make is to build models with stocks whose
values can either go negative, or run off to infinity. Common sense, of course, dictates that no
64

real system can grow infinitely large, and hence that no model of a real system should be able
to grow infinitely large. Similarly, common sense suggests that, since many real world
variables cannot take on negative values, their model-based counterparts should not be able to
take on negative values .
When a system dynamicist looks for relationships in an actual system that prevent its stocks
from going negative or growing infinitely large, he or she is usually looking for the system's
nonlinearities. Nonlinear relationships usually define a system's limits .
Nonlinear relationships play another important role in both actual systems and system
dynamics modeling. Frequently, a system's feedback loops will be joined together in
nonlinear relationships. These nonlinear "couplings" can cause the dominance of a system's
feedback loops to change endogenously. That is, over time, a system whose behavior is being
determined by a particular feedback loop, or set of loops, can (sometimes suddenly)
endogenously switch to a behavior determined by another loop or set of loops. This particular
characteristic of nonlinear feedback systems is partially responsible for their complex, and
hard-to-understand, behavior . As a result, system dynamics modeling involves the
identification, mapping-out, and simulation of a system's stocks, flows, feedback loops, and
nonlinearities.

Implications of System Structure

One of the reasons that mental models are so complex is simply that the real-world systems
that humans are trying to understand are highly complex. Over the years, system dynamicists
have identified characteristics that seem to appear again and again in real-world systems -particularly social systems . They have found that: (1) symptoms of a problem are often
separated from the actual problem by time and space; (2) complex systems often behave
counter to human intuition; (3) policy intervention in complex systems can frequently yield
short-term successes but long-term failure, or the reverse; (4) internal system feedback often
counters external policy intervention;(5) it is better to structure a system to withstand
uncertain external shocks than to try to predict those external shocks; (6) real-world complex
systems are not in equilibrium and are continually changing.
These characteristics arise due to the nonlinear stock, flow, feedback structures of social
systems.

A System Problem and Its Symptoms are Separated By Time

and Space
One of the reasons that problems are often hard to solve in social systems is that they are
frequently separated from their causes by both time and space. This is a result of both system
delays (due to stocks) and system interconnectedness (due to feedback loops).
65

Consider once again, Figure 19, shown below. Investment performance in an insurance
company (shown in the top right of the figure) is shown to be directly influenced by portfolio
mismatch, but only after a significant delay, and indirectly influenced by many factors that
are far removed (spatially) from the firm's financial performance (e.g., sales person skills).
Managers in actual insurance companies may or may not be aware of these delays and
connections, but their existence ensures that, if a problem arises with an insurance firm's
investment performance, deciding what to do to permanently correct it will be difficult
indeed. Mentally keeping track of the various interactions and delays, over time, is next to
impossible in such a system.

Figure 19: Causal Loop Diagram of a Model Examining the Growth or Decline of a Life
Insurance Company .
The fact that system problems and system symptoms are separated by time and space implies
the need for a holistic or systems approach to problem solving. Although this is perhaps
obvious to someone reading this book, it is the exact opposite of the traditional approach to
problem solving practiced in most of science and in most organizations. The traditional
approach to problem solving is the reductionist approach, which involves breaking down a
system experiencing a problem into "manageable" pieces and then analyzing each piece in
isolation. The reductionist approach ignores the connections between a system's pieces,
because the behavior of an entire system is thought to be merely the sum of the behaviors of
its parts. This view is implicitly a "linear" view of the world as the behavior of a linear
system is, indeed, merely the sum of the behavior of its parts. The behavior of a nonlinear
system, however, is more than just the sum of its parts. A nonlinear system can only be
analyzed in its entirety, with the connections between its parts being as important as the parts
themselves. An old Sufi allegory known as the "Blind Ones and the Matter of the Elephant"
illustrates the folly of the reductionist approach to problem solving, and the usefulness of a
"nonlinear" approach to problem solving, quite nicely.

66

Beyond Ghor was a city. All its inhabitants were blind. A king with his
entourage arrived nearby; he brought his army and camped in the desert.
He had a mighty elephant, which he used in attack and to increase the
people's awe.
The populace
became anxious to
learn about the
elephant, and some
sightless from
among this
community ran like
fools to find it. Since they did not know even the form or shape of the
elephant, they groped sightlessly, gathering information by touching
some part of it. Each thought that he knew something because he could
feel a part.
When they returned to their fellow-citizens, eager groups clustered
around them, anxious, misguidedly, to learn the truth from those who
were themselves astray. They were asked about the form, the shape, of
the elephant, and they listened to all they were told.
The man whose hand had reached the ear said, "It is a large, rough
thing, wide and broad, like a rug." One who had felt the trunk said, "I
have the real facts about it. It is like a straight and hollow pipe, awful
and destructive."One who had felt its feet and legs said, "It is mighty
and firm, like a pillar."
Each had felt one part out of many. Each had perceived it wrongly.
Idries Shah. 1969. "The Blind Ones and the Matter of the Elephant," p. 25. In: Tales of the Dervishes. New York: E.
P. Dutton.

Counterintuitive Behavior
Nonlinear stock-flow-feedback systems frequently behave in ways that are counterintuitive or
different from that which a decision maker's unaided mental model would suggest -particularly in response to the dynamics of a policy change. Forrester notes, for example, that
both the places where "high leverage points" (i.e., places at which a policy change can
permanently alter a system's behavior) are located, and the direction in which a decision
maker must "push" a system to change it's behavior, are counterintuitive .
Frequently, the counterintuitive behavior of social systems is due to the existence of negative
feedback loops. As an example, consider a small sailboat with a rudder in the stern. If the
sailor operating the boat wishes to turn the bow (front) to the starboard (right), he or she must
67

turn the rudder, located in the stern, to port (left). In other words, he or she must intervene
with a policy change (turn the rudder) in a place (the stern) different from where the change
will manifest itself (the bow) and in a direction (port) opposite from the one desired for the
entire system (starboard). A sailboat is a negative feedback system in the sense that there is a
desired direction the sailor wishes to point the bow of the boat and an actual direction the
bow of the boat is pointing. If a discrepancy develops between the desired direction and the
actual direction, corrective action (moving the rudder) is taken.
A second example of a simple negative feedback loop system that can exhibit counterintuitive
behavior is a thermostat. Consider the following thought experiment. If a person is given a
cigarette lighter (i.e., a small heat source) and an ice cube (i.e., a small source of cold) and
asked to apply one to the sensor on the thermostat to make a room warmer, which one should
he or she choose? The answer, of course, is the ice cube because applying a cold source to the
thermostat's sensor would cause the furnace to turn on and heat the room.

Better Before Worse or Worse Before Better

Another characteristic of complex feedback systems is that policy changes can frequently
make them better before making them worse, or worse before making them better. Again, this
is due to the long run effects of feedback. Ignoring a system's long run feedback effects can
lead to policies that yield unintended consequences (see Figure 20 below).

Figure 20: Ignoring the Long Run Effects of Feedback Can Lead to Unintended
Consequences
Consider the example of congestion in a city's expressway system. If the policy response is to
significantly expand the capacity of the system, the short run result is a lessening of
congestion. But, as information about the improved, even pleasant-to-use, expressway system
begins to affect longer run decisions such as where people choose to live (e.g., people move
to the suburbs and commute to work via the improved expressway system), the congestion
can return and even be worse than before. Of course, the effect can occur in the opposite
direction as, closing down some of a city's expressway to create congestion can, in the long
term, cause people to resettle near the city and/or to build and use public transportation.
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Policy Resistance
Frequently, a nonlinear feedback system will respond to a policy change in the desired
manner for a short period of time, but then return to its pre-policy-change state. This occurs
when the system's feedback structure works to defeat the policy change designed to improve
it.
Policy resistance is caused by a system's negative feedback processes. Consider the example
of the percentage of white students attending Boston schools with nonwhite students, before
and after mandatory busing was instituted as a policy change. The data for the years 1968 1992 is shown in Figure 21. Inspection of the figure reveals that the percentage of white
students attending Boston schools with nonwhite students shot up immediately after the
busing policy was instituted in 1974, but then gradually declined so that by 1982 it had return
to its pre-busing level.

Figure 21: Percentage of White Students Attending School with NonWhite

Students in Boston
Policy resistance occurs when a policy is applied to a system dominated by negative feedback
processes and the policy change does not alter the desired states of the negative loops. In the
case of the percentage of white students attending Boston schools with nonwhite students, the
busing policy did not change the desire of white parents to have their children attend school
primarily with other white students. In other words, it did not change the parents' desired
percentage of white students in the schools to which they sent their children. Thus, after
busing was instituted, many white families gradually moved to the suburbs and enrolled their
children in primarily white schools.

Unpredictability
Many decision makers spend enormous amounts of time and money trying to develop models
to precisely predict or forecast the future state of a system. From a system dynamics point of
view, however, this is a poor use of a decision maker's resources. There are two reasons for
this. The first is that it is impossible, in principle, to precisely predict the future state of a
nonlinear feedback system, except in the very short term. The second is that, even if it were
69

possible to predict the future state of a nonlinear feedback system, a decision maker's
resources are better spent trying to predict the behavior mode of a system in response to a
proposed policy change, and in trying to redesign the stock-flow-feedback structure of a
system so that it behaves well, regardless of what happens in the future.

Figure 22: A System Continuously Shocked by External Forces

Any real system, whether it is a physical system, biological system, or social system, is
continuously shocked or buffeted by external (exogenous) forces. An aircraft, for example is
shocked by bursts of wind. The human body is shocked by changes in temperature (e.g.,
stepping into a cold shower). A firm is shocked by sudden changes in the demand for its
product due to, say, changes in customer tastes and preferences. Figure 22 depicts a system
that is being continuously shocked by external forces.
When a decision maker attempts to forecast the future state of a system, he or she is
essentially trying to forecast the timing, magnitude, and direction of the incoming shocks that
are perturbing the system, so that he or she can respond to them. The implied mind-set of the
decision maker is that the shocks, rather than the stock-flow-feedback structure of the system,
are responsible for the behavior of the system. The decision maker's search for the causes of
the system's problems is outward or towards the shocks, rather than inward or towards the
stock-flow-feedback structure of the system. From a system dynamics point of view, the
decision maker's resources would be better spent trying to redesign the stock-flow-feedback
structure of the system so that it responds well to shocks, regardless of when they arrive, how
large their magnitude, or in what direction they push the system. The system dynamics
perspective is an inward or endogenous point of view.
In order to illustrate how it is impossible, in principle, to forecast the future state of a
nonlinear feedback system, consider the following experiment . Figure 23, below, is a simple
system dynamics model depicting the interaction between elephants and hunters. In the
experiment, this model is defined to be the "real world system." Next, an exact copy of the
"real world system" is made. The "model" is perfect in the sense that its nonlinear stock-flowfeedback structure, its parameters, its distribution of random variates, and its initial values,
are identical to those of the "real world system." The "model" is thus more perfectly specified
than any actual social system model could ever be in the true real world.

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(click on figure to run simulation)

Figure 23: Elephant-Hunter Model

The experimental simulation of the "model" and "real world system" is set up so that, in
period twenty, the "model" begins utilizing a random number stream that has been initiated
by a seed value different from the one that initiated the random number stream that is being
used by the "real world system" . In other words, before period twenty, the "model" and "real
world system" are completely identical. After period twenty, the "model" and "real world
system" are identical in every way except for the seed values that initiate the streams of
random numbers exciting their behaviors.

71

Figure 24: Simulated Time Series Plot of Hunters from the "Model" and "Real
World System"
Figure 24 is a time series plot of the simulated stock of hunters from both the "model" and
"real world system." Before period twenty, the two curves are clearly identical and overlay
perfectly. After period twenty, however, they begin to diverge significantly. Indeed, from
about period thirty forward, the perfectly specified "model" of the "real world system"
predicts the correct number of hunters in the system, only by chance. The conclusion is thus
that, even a perfectly specified model cannot predict the future state of a nonlinear feedback
system, except in the very short term. Point prediction is thus impossible in principle.

Disequilibrium
As was pointed out earlier, all actual social systems exist in a state of disequilibrium. This implies that
actual social systems possess on-going pressures for change, and stocks that decouple flows and allow
inflows to differ from outflows. It also implies that using equilibrium-based modeling techniques,
such as many of those used in economics and management, will frequently not yield insights that
directly relate to the dynamic behavior of actual social systems.

In the previous chapter, Building Blocks, we presented the basic "concepts" and "language" used to
describe the structure underlying complex system behavior. We put forth the case that a well-known
set of time paths can describe, individually or in combination, the behavior of virtually all dynamical
systems. We introduced the idea that all dynamic behavior in the world occurs due to the interaction
between stock and flow variables, and the interaction between sets of stocks/flows within larger
feedback loops.
In this chapter, we use these ideas to explore the
underlying system structure responsible for the basic
families of time paths including: exponential growth and
decay, goal-seeking behavior, system oscillation, and sshaped behavior. To do this, we develop a sequences of
small simulation models that explain the major modes of
systems behavior, while presenting some the basic
mathematics behind computer simulation.

Exponential Growth, Exponential Decay, and Goal Seeking

Behavior
In this section, we will examine the dynamics of three fundamental behavior modes:
exponential growth, exponential decay, and goal seeking, with the intention of illustrating
that these well-known time paths can be mimicked, and hence understood and explained, by
simple system dynamics structures. We will pull together the building blocks presented in the
previous chapter, and for the first time, introduce the reader to some of the fundamentals of
system dynamics computer simulation modeling. Before this can be accomplished, however,
it is necessary to draw a distinction between analytical solutions and simulated solutions to
dynamical systems of equations.
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Analytical Versus Simulated Solutions

Recall that Chapter 3 described the characteristics of stocks:
they have memory, (usually) change the time shape of flows,
decouple flows, and create delays. Now, let us consider more
specifically how a computer calculates the behavior of stock and
flow structures. The subject of computer simulation is critical as
we move beyond the discusssion of simple linear feedback
systems and delve into situations where there are many stocks, and their corresponding flows
are complicated and continuously changing over time, due to the (often nonlinear)
interactions between them. In other words, this question is of primary importance when the
limitations of human cognition are reached and computer simulation is necessary to reveal
the dynamics of a system.

Figure 1: Example of a Stock and a Flow

Figure 1 above is a copy of the simple stock-flow structure that was first presented in Chapter
3 (Stocks and Flows section, Figure 1). Given this structure, Figure 2 below shows the time
path of the flow which, in this instance, is linear and set at an arbitrarily
determined constantpositive value. In other words, the flow valve is opened to some positive
value and does not change from this position over time.

Figure 2: The Amount that Flowed into the Stock is the Area of the Rectangle (DT = 1)
Knowing that flows cause stocks to fill or drain, looking at the time path of the flow variable
in Figure 1 we can say that the height to which the stock will fill due to its rate of flow over
the (arbitrarily determined) time period from t=0 to t=1, is the area beneath the time path of
the flow from period t=0 to t=1. This is shown by the shaded rectangle in Figure 2. The area
of the rectangle is easy to calculate, of course, as it is merely the height of the rectangle (i.e.,
the value of the flow at any point from t=0 to t=1) multiplied by the length of the rectangle
73

(i.e., the time span from t=0 to t=1). If we define the time span from t=0 to t=1 to be "DT"
then the:

Exact Amount that Flowed into Stock from Time Period 0 to Time Period 1
= Area of Rectangle
= Value (Height) of the Flow * Change in Time
= f(1) * DT
Equation 1
Simulated Solutions
The situation gets a little more complicated, however, when the flow variable in Figure 1
is not constant but changes over time. Figure 3 is a graph of a quadratic inflow to the
stock (i.e., one that is nonlinear with one "bend" or "curve"). Applying the same logic
that was used in the last example -- i.e., finding the area of a rectangle "beneath" the
time path of the flow -- yields an overestimate of the amount that has flowed into the
stock from t=0 to t=1. The "wedge" area above the curve in Figure 3 is the amount by
which the rectangle overestimates the amount that has flowed into the stock.

Figure 3: The Approximate Amount that Flowed into the Stock is the Area of the
Rectangle (DT = 1)
But what if the change in time, DT, is made smaller? What if DT is, say, cut in half?
Figure 4 replicates the time path from Figure 3, but shows a DT of .5 -- i.e., half as large
as before.
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Figure 4: Approximating the Amount that Flowed into the Stock (DT = .5)
This time, the approximate amount that has flowed into the stock from t=0 to t=1 is
the sum of the areas of two rectangles. That is the:
Approximate Amount that Flowed into Stock from Time Period 0 to Time
Period 1
= Area of Rectangle 1 + Area of Rectangle 2
= [f(.5) * DT ] + [f(1) * DT]
= [f(.5) + f(1)] * DT
= t=0

t=1

f(t) * DT

Equation 2
Further, the amount by which the sum of the area of the rectangles overestimates the
amount that has flowed into the stock is now the sum of the two wedges above the time
path of the flows.
There are two significant implications of reducing DT to .5 -- i.e., of cutting it in half.
The first is that it doubles the number of areas (rectangles) that have to be calculated
(from one to two). The second is that it reduces the error in the estimate of the amount
that flowed into the stock from t=0 to t=1. The second implication can be seen by
comparing Figures 4 and Figure 3. The sum of the areas of the two wedges above the
time path of the flow in Figure 4 is less than the area of the single wedge above the time
path of the flow in Figure 3.

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Figure 5: Approximating the Amount that Flowed into the Stock (DT = .25)
In fact, the error in the estimate of the amount that flowed into the stock from t=0 to t=1
can be reduced even more by systematically reducing the size of DT. Figure 5 shows
what happens when DT is cut in half again (to a value of .25) and Figure 6 shows what
happens when DT is given a value of .125. In each case, the overestimate of the amount
that flowed into the stock is reduced and the number of areas (rectangles) that must be
calculated is doubled. For example, in the case of Figure 5 the:

Approximate Amount that Flowed into Stock from Time Period 0 to Time
Period 1
= Area of Rectangle 1 + Area of Rectangle 2 + Area of Rectangle 3 + Area
of Rectangle 4
= [f(.25) * DT ] + [f(.5) * DT ] + [f(.75) * DT ]+ [f(1) * DT]
= [f(.25) + f(.5) + f(.75) + f(1)] * DT
= t=0

t=1

f(t) * DT

Equation 3

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Figure 6: Approximating the Amount that Flowed into the Stock (DT = .125)
The trade-off between accuracy and number of calculations should be clear at this
point. The more accurate the estimate of the amount that has flowed into a stock, the
more areas (rectangles) that have to be calculated.
Most modern-day system dynamics software packages allow a system dynamicist to
create a model by placing icons (stocks, flows, feedback links, etc.) on an electronic piece
of paper displayed on a computer screen, and connecting them together with the
computers mouse. While this is occurring, the software automatically generates
equations that correspond directly to each of the icons. The stock icon in Figure 1, for
example, corresponds directly to a mathematical equation that tells a computer how to
calculate the amount that has flowed into it during a particular period of time. In
general terms, this equation is:

Stockt = Stock(t-DT) + DT * Flow(t-DT) -> t

Equation 4
In english, Equation 4 says that: "The amount that has flowed into the stock up to some
time, t, is approximately equal to the sum of the areas of the rectangles prior to the time
that the most recent time step (DT) was taken (Stock (t-DT)), plus the area of the rectangle
defined by the height of the Flow during the most recent time step (Flow (t-DT) -> t) . This
step-by-step process of determining the areas of rectangles and adding them up -- i.e., of
determining the amount that has flowed into a systems stocks over time or the systems
time path -- is called numerical simulation.
In order to more accurately locate the place of system dynamics in the more general
world of dynamical modeling, a simulated solution to a systems equations of motion
must be contrasted with an analytical solution to a systems equations of motion.
A simulated solution to a dynamical set of equations has some drawbacks. It cannot
reveal the exact amount that has flowed into a systems stocks at any time period, but
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only the approximate amount that has flowed into a systems stocks at short time
intervals (DTs) between successive computations. Further, to determine the approximate
amount that has flowed into a systems stocks at a future period of time, a simulated
solution requires the calculation of the amounts that flowed into the systems stocks
in all earlier periods of time. Lastly, a simulated solution is a particular solution (i.e., a
particular time path) that cannot reveal anything about the general nature of the
systems dynamics.
Analytical Solutions
In principle, a dynamical systems time step, DT, could be cut in half forever. If this
were to occur, the error in approximating the amount that flowed into the systems
stocks would be systematically reduced until it became infinitesimally small. In more
traditional mathematical notion this means that the:

Exact Amount that Flowed into Stock from Time Period 0 to Time Period
1
= lim DT -> 0 [ t=0
= t=0

t=1

t=1

f(t) * DT ]

f(t) * dt

Equation 5
Equation 5 represents (in general terms) the continuous time version of the dynamical
system presented in Figure 1. In this version of the model, DT is infinitesimally
small and the solution to the equation reveals exactly how much has flowed into the
systems stock from t=0 to t=1 . The solution to Equation 5, if it exists, is an exact
analytical solution .
In contrast to simulated solutions, analytical solutions are general solutions to dynamic
systems of equations. Rather than revealing the approximate amounts that have flowed
into a systems stocks at short time intervals (DTs) between successive computations,
they reveal the exact amounts that have flowed into a systems stocks at any period of
time. In other words, for any system possessing an analytical solution, any time period
can be substituted into the solution and it will yield the exact amounts that have flowed
into the systems stocks. The solution does not require the calculation of the amounts
that flowed into the systems stocks in all earlier periods of time. In addition, the form
of a systems analytical solution reveals much about the general nature of its dynamics,
even without any numerical computation.
Given all of the apparent advantages offered by exact analytical solutions, why do
modelers bother to use simulated solutions at all? The answer is quite simple: only
linear systems have exact analytical solutions. This is because: (1) they can be broken
down into parts, (2) the behaviors of the parts can be determined, and (3) the behavior
of the entire system can be found by adding together the behaviors of the parts. In other
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words, the behavior of a linear dynamical system is merely the sum of the behaviors of
its parts.
Nonlinear systems, on the other hand, cannot be broken down into pieces and solved
analytically. They must be analyzed as a whole. The connections between the parts of a
nonlinear system are as vital to its behavior as the pieces themselves. Indeed, the
behavior of a nonlinear system is more than merely the sum of the behaviors of its parts.
Since nonlinear dynamical systems do not have exact analytical solutions, their behavior
can only be determined through simulation.
In sum, if the real world is nonlinear (i.e., has limits), if humans are incapable of
thinking through all of the dynamic implications of their mental models, and if
nonlinear dynamical models have no analytical solutions, simulation modeling is
necessary for improved dynamical thinking and learning.

Exponential Growth
Exponential growth is one of the most common time paths exhibited by systems in the world.
It has two characteristics that are very important to note. The first characteristic is its power.
Exponential growth can occur very rapidly. The second characteristic is its insidiousness.
Exponential growth can "sneak up" on a person!
Consider the case of repeatedly folding a standard piece of paper in half, doubling its
thickness with each fold . After five or six folds, the paper is not particularly thick. But how
thick would it be after 36 more folds? As shown in Figures 7a and 7b, after 42 folds a
standard piece of paper would be approximately 280,000 miles thick -- more than the
distance from the Earth to the moon! Further, the shape of the plot shows that the big
explosion in thickness occurs at the end of the plot. For most of the simulation run, the
systems growth is hardly distinguishable from the horizontal axis . The last few doublings,
however, really make the thickness grow .

Figure 7a: Folding a Piece of Paper

Figure 7b: Exponential Growth of the Thickness of a

Piece of Paper

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In terms of a system dynamics model that can produce exponential growth, consider Figure 8
-- a "first cut" stock-flow structure of an elephant herd system. The figure presents the
models stock and flow icons, the corresponding system dynamics equations, and
the dimensions of each equation. As will become apparent throughout the remainder of this
book, the specification of the dimensions of every equation in a system dynamics model is an
important part of the modeling process. It helps the modeler both document a model and
conceptualize its structure. Stocks are dimensioned in terms of "units" ("Elephants") and
flows are dimensioned in terms of "units/time" ("Elephants/Year"). Other variables in a
system dynamics model must possess dimensions that correspond algebraically to its stockflow-feedback loop structure . Examples of system dynamics models that have been properly
dimensioned will be presented ahead.

Figure 8: "First Cut" Stock-Flow Structure of an Elephant Herd Model

Figure 9 presents a simulation of the "first cut" model, when the initial number of elephants
in the herd is set at ten and a constant number (two) of baby elephants are born each year.
Clearly the model exhibits a linear, rather than an exponential, growth.
(Click on image to run simulation)

Figure 9: Simulation of the First Cut of the Elephant Herd Model (Initial Elephants = 10)
Before moving directly to a structure that exhibits the exponential time shape, it is perhaps
better to "think like a modeler" for the moment. A good system dynamicist will test each of
the structures he or she creates for "robustness." This means that he or she will test to see if
their model behaves "properly" under a variety of circumstances, both normal and extreme. If
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a model behaves properly in response to robustness testing, the system dynamicist can be
confident that it will behave properly when interfaced with other model structures.

Figure 10: Simulation of the First Cut of the Elephant Herd Model (Initial Elephants = 0)
Figure 10 shows the results of a robustness test done on the "first cut" elephant herd model.
For the purpose of the test, the initial number of elephants in the herd (stock variable) was
changed to zero. Clearly the simulation makes no sense. The number of elephants in the herd
grows even though there are initially no elephants to produce baby elephants. The conclusion
is that the model does not behave properly in response to this extreme test and is therefore
"nonrobust."
The next cut of the model should be aimed at correcting the robustness problem. The first cut
of the model generated an implausible result because elephants are needed to produce more
elephants. This biological fact implies that a feedback link from the stock of elephants to the
flow of elephant births is required so that the computer can calculate the number of baby
elephants produced by the elephant herd each year.
Figure 11 presents the "second cut" of the elephant model. It contains a feedback link from
the stock of elephants to the birth rate flow, an additional icon (the birth rate coefficient
(BirthRateCoef)), and an additional information link.

Figure 11: "Second Cut" of the Elephant Herd Model (Initial Elephants = 0)
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Figure 12 shows the results of a simulation of the model when the initial number of elephants
is set at zero. Clearly, the new formulation of the model has cured the robustness problem
revealed in Figure 10. When there are initially no elephants in the herd, no baby elephants are
born and the size of the herd remains at zero.
(click on image to run simulation)

Figure 12: Results of a simulation using "Second Cut" of the Elephant Herd Model (Initial
Elephants = 0)
Figure 13, on the other hand, is a simulation of the model when the initial number of
elephants is ten. In this case, the positive feedback loop created between elephants and baby
elephants causes the exponential growth path of the elephant herd.
(Click on image to run simulation)

Figure 13: Simulation of the "Second Cut" of the Elephant Herd Model (Initial Elephants =
10)

Generic Structure
Over the years, system dynamicists have identified combinations of stocks, flows and
feedback loops that seem to explain the dynamic behavior of many systems. These frequently
occuring stock-flow-feedback loop combinations are often referred to as "generic structures"
.

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Figure 14 shows a generic structure responsible for exponential growth and its corresponding
causal loop diagram. It is the generic version of Figure 11 -- a generic first order positive
feedback loop system . Most system dynamicists think about this structure when modeling a
system that grows exponentially; the contents of the stock produces more of the contents of
the stock.

Figure 14: A Generic Structure Responsible for Exponential Growth

Figures 15 and 16 illustrate two other specific instances of this generic structure. Figure 15
shows positive exponential feedback in an interest compounding savings account. Figure 16
shows how knowledge accumulates in a particular scientific field of study.

Figure 15: Structure for a simple interest compounding savings account

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Figure 16: Structure for the growth of knowledge in a particular flield of study

Exact Analytical Solution for a First Order, Linear, Positive Feedback Loop System
The first order positive feedback loop system of Figure 14 is a linear system. As a result, in
addition to its simulated solution, it possesses an exact analytical solution. This solution is:

Stockt = Stock0 * e Coef * t

Equation 1
For the more mathematically inclined reader, the derivation of this solution is shown in the
box below. Although the case has already been made that simulated solutions
to nonlinear systems are preferable to analytical solutions to linear systems, Equation 1 can
be used to generate some insights that are useful in system dynamics modeling.

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Derivation of the Analytical Solution

Therefore, the exact analytical solution is:

Stockt = Stock0 * eCoef * t
For example, at time = 50, with a Coef of .02 and an
initial Stock of 100:
Stock50 = 100 * e 0.02 * 50 = 271.8281828

Using the Exact Analytical Solution to Test Numerical Integration Methods

Equation 1 can be used to determine the accuracy of various simulated solutions to the
generic first order positive feedback loop system shown in Figure 14. Generally speaking,
simulated solutions to system dynamics models differ by step size (DT) and/or numerical
integration method employed. As was previously discussed, reducing DT makes a simulated
solution more accurate, but forces the computer to do more work. In a similar way, numerical
integration methods vary by accuracy and required number of calculations.
Most system dynamics software packages go through the following sequence of events to
simulate a model :

Initialization Phase
o Create a list of all equations in required order of

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evaluation.
o Calculate initial values for all stocks, flows and
auxiliaries (in order of evaluation).
Iteration Phase
o Estimate the change in stocks over the interval DT.
o Calculate new values for stocks based on this
estimate.
o Use new values of stocks to calculate new values
for flows and auxiliaries.
o Add DT to simulation time.
o Stop iterating when Time >= StopTime

Step 1 of the Iteration Phase is the place where most numerical integration methods differ.
More specifically, different numerical integration methods estimate the change in a model's
stocks over the interval DT in different ways.
Although many numerical integration methods exist, the two that are most frequently used in
system dynamics modeling are Euler's method and a second order Runge-Kutta method.
Euler's method is the simplest and least accurate (for a given DT) numerical integration
method available . Indeed, due to its conceptual simplicity, it is the method upon which the
nomenclature of the generic system dynamics stock equation is based.
In Step 1 of the Iteration Phase of the simulation of a system dynamics model, Euler's method
estimates the change in a model's stocks over the interval DT as:
Stock = DT * Flow at Beginning of DT
Thus, in Step 2 of the Iteration Phase, the new values for a model's stocks are calculated in
the following way:
Stockt = Stock(t-DT) + Stock
Stockt = Stock(t-DT) + DT * (Flow(t-DT) => t)
Of course, this is precisely the same formulation as Equation 4 of Analytical-vs-Simulated
Solutions.
A second-order Runge-Kutta method differs from Euler's method in that it uses two flow
calculations within a given DT to create an estimate for the change in a model's stocks over
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the interval DT. More precisely, during Step 1 of the Iteration Phase of a simulation, a second
order Runge-Kutta method estimates the change in a model's stocks over the interval DT as:
F1 = DT * Flow at Beginning of DT [same as in Euler's method]
F2 = DT * Flow at End of DT = DT * Flow(Stock(t) + F1)
Stock = 1/2 * (F1 + F2)
Stockt = Stock(t-DT) + Stock
Stockt = Stock(t-DT) + 1/2 * (F1 + F2)
In other words, a second-order Runge-Kutta method estimates the change in a model's stocks
by taking the mean of the flows that occur at the beginning and at the end of each time step.

Figure 17: Comparison of Exact Analytical Solution to Simulated Solution (Euler's Method;
DT = .5)
Figure 17 compares the results of simulating the generic first order positive feedback loop
system shown in Figure 14 via Euler's method with a DT of .5, against the exact analytical
solution to the system given by Equation 1. In each case, the initial value of the stock is set
equal to 100 units and the value of the growth coefficient is set at .02 units/unit/time.
Athough each solution starts at the same place, the simulated solution quickly diverges from
its exact counterpart. Indeed by period 10, the exact amount in the stock is 122.14 units,
while the simulated solution indicates that it contains only 122.02 units.
In a similar way, Figure 18 compares the exact analytical solution to the generic first order
positive feedback loop system against a simulated solution using Euler's method and a DT
of .25. Clearly, cutting DT in half improves the accuracy of the simulated solution, as the
simulated value of the stock at period 10 is now 122.08.

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Figure 18: Comparison of Exact Analytical Solution to Simulated Solution (Euler's Method;
DT = .25)
Finally, Figure 19 compares Equation 1 to a simulated solution utilizing a second order
Runge Kutta method and a DT of .25. Inspection of this figure reveals that the simulated
solution is now equal to the exact solution, to two places to the right of the decimal point,
throughout the entire simulation.

Figure 19: Comparison of Exact Analytical Solution to Simulated Solution (Second Order
Runge Kutta Method; DT = .25)
Measures of Exponential Growth
The exact analytical solution to a first order, linear, positive feedback system (Equation 1)
can be used to derive two important measures of exponential growth. The first of these
measures is the system's time constant. The second is sytem's doubling time.
Time Constant
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Figure 20 depicts a system dynamics representation of a first order, linear, positive feedback
loop system with an exact analytical solution represented by Equation 1. The time constant of
this system, Tc, measured in units of time, is defined to be 1/Coef.

Figure 20: First Order, Linear, Positive Feedback Loop System

Given the definition of the system time constant, the following question can be asked: How
much exponential growth occurs during one time constant's worth of time? To answer this
question, the system's time constant must be inserted into equation 1. Thus, the amount of
exponential growth that occurs during one time constant of time is:
Stockt = Stock0 * eCoef * t
Stockt = Stock0 * eCoef * Tc
Stockt = Stock0 * eCoef * (1/Coef)
Stockt = Stock0 * e1
Stockt = Stock0 * 2.71828
In other words, the amount of exponential growth that occurs during one time constant is
2.71828 times the initial amount in the system's stock. Pushing this logic to the next step, the
amount of exponential growth that occurs during two time constants is 7.3890 (i.e., 2.71828 *
2.71828) times the initial amount in the system's stock.

89

Figure 21: Exponential Growth After One and Two Time Constants have Elapsed
Figure 21 shows the amount of exponential growth that has taken place in a first order, linear,
positive feedback loop system, with a Coef of .1 and an initial value of 100, after one and two
time constants have elapsed. After one constant, the stock has grown from 100 to 271.83 and
after two time constants it has grown to a value of 738.90.
Doubling Time
The second measure of how quickly exponential growth is proceeding in a first order, linear,
positive feedback system is its doubling time. A system's doubling time is simply the amount
of time it takes for the contents of its stock to double.
The doubling time of a first order, linear, positive feeback loop system, T d, is equal to seventy
percent of its time constant. That is: Td = .7 * Tc . For the more mathematically inclined
reader, the derivation of this result is provided in the shaded box below.

Derivation of the Doubling Time for a First Order, Linear, Positive Feedback Loop
System

The doubling time for a first order, linear, positive feeback loop system is calculated
using Equation 1. If the doubling time, Td, is defined to be the time it takes to double the
initial value of a stock, then:
2*Stock0 = Stock0 * eCoef * Td
Since the system's time constant, Tc, is 1/Coef, then the system's Coef = 1/Tc. Thus:
2 * Stock0 = Stock0 * e 1/Tc * Td
Dividing both sides by Stock0 yields:
2 = eTd/ Tc
Taking the natural logarithm of both sides yields:
ln(2) = ln(eTd/Tc)
Or:
.69 = Td / Tc
Or:
.7 = Td / Tc

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Or:
Td = .7 * Tc
Thus, the doubling time of a first order, linear, positive feeback loop system is seventy
percent of its time constant.

Figure 22 shows the same simulation run presented in Figure 21. This time the figure shows
that the system's stock doubles from a value of 100 to a value of 200 in (approximately) the
seventh period (.7 multiplied by the time constant of 10 periods).

Figure 22: Doubling Time for a First Order, Linear, Positive Feedback Loop System

The concept of doubling time leads directly to a heuristic known as the Rule of 70. This rule
says that, if you know, or can estimate, how quickly an exponentially growing system is
growing (i.e., if you know, or can estimate, Coef in Equation 1), you can calculate its
doubling time as Td = (70 / Coef) * 100.
Consider, for example, the growth of the United States economy. As shown in Figure 23, U.S.
nominal GDP grew exponentially at a rate of 7 percent per year, from 1959 to 1995 (i.e., Coef
is estimated to be .07055). At this rate of growth, the Rule of 70 says that the nominal size of
U.S. economy will double in (70 / .07055)*100 = 9.86 years.

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Figure 23: U.S. Nominal GDP (1959-1995)

Goal Seeking Behavior

Chapter 3 discussed the two types of feedback loops that exist in the world: positive loops
and negative loops. Positive loops generate exponential growth (or rapid decline) and
negative loops produce goal-seeking behavior. This section introduces and analyzes a first
order negative feedback loop system.

Figure 1: Generic First Order Negative Feedback Loop System

Figure 1 presents a generic, first order, linear, negative feedback loop system. The model is
initialized in equilibrium by setting the initial value of the stock equal to its goal, and then
"shocked" out of equilibrium (at time=1) by a step function that changes the system's goal
from ten to fifteen. This procedure -- ie., starting a system dynamics model in equilibrium
and then shocking it out -- is widely used in system dynamics because it allows the modeler
to see the "pure" behavior of the system in response to the shock. Moreover, it illustrates
another important idea in system dynamics modeling: A system containing negative feedback
loops will be in equilibrium only when all of its stocks are equal to all of its goals
simultaneously.
The implication of this idea is very important. In the real world it is rare, if not impossible, to
find actual systems (particularly actual social systems) that exist in states of equilibrium
because actual systems contain many negative feedback loops that do not reach their
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goals simultaneously. Thus, system dynamicists often start their models in states of
equilibrium, not because they feel that this reflects reality, but rather because it is a useful
reference point for analyzing the "pure" behaviors of their models .

Figure 2: Simulation of the Generic First Order Negative

Feedback Loop System in response to a step increase at time=1

The behavior exhibited by the negative feedback loop system as shown in Figure 2 is goal
seeking. When the goal is increased from ten to fifteen, a discrepancy between the stock and
its goal is created. In response to this discrepancy, the system initiates corrective action by
increasing its flow and smoothly raising its stock to a value of fifteen . The time it takes the
system to reach its new goal is determined by the size of TimeCoef. The bigger TimeCoef is,
the longer it takes for the system to adjust to its new goal. This is illustrated in Figure 3,
where the negative feedback loop system of Figure 1 is simulated with three different values
of TimeCoef (1, 2, and 3) in response to a reduction in the goal (opposite the case shown in
Figures 1 and 2) from ten down to five with a step function at time=1.
(Click on image to run simulation)

Figure 3: Three Simulations of the Generic First Order Negative

Feedback Loop System give a step reduction at time=1

Exact Analytical Solution

To more precisely determine how long it takes a linear first order negative feedback loop
system to reach its goal, the exact analytical solution to the model presented in Figure 1 must
be studied. This solution is:
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Stockt = Goal + (Stock0 - Goal) * e-(1 / TimeCoef)*t

Equation 1

To study Equation 1, it is helpful to look at the special case when the system is seeking a goal
of zero. Equation 2 presents this special case. It found by simply substituting goal values of
zero into Equation 1.

Stockt = Stock0 * e-(1 / TimeCoef)*t

Equation 2

One very important thing to note about Equation 2 is that it is very similar to Equation 1
of Exponential Growth, the exact analytical solution to a linear positive feedback loop
system. Indeed, Equations 1 of Exponential Growth and Equation 2 differ only by the signs of
their exponents. Equations 1 of Exponential Growth has an exponent of Coef * t and
Equation 2 has an exponent of -(1/TimeCoef) * t. Since Coef and 1/TimeCoef are both
numbers, the exponents, and hence the equations, differ only by sign.
The reason that Equation 2 has a minus sign in front of its exponent is that it represents a
system seeking a goal of zero. Thus, under the assumption that the system's stock contains
positive values, the system will steadily lose units via its outflow until there is nothing left .
This process is known as exponential decay.
For the more mathematically inclined reader, the derivation of Equation 1 is presented in the
shaded box below.

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Derivation of the Analytical Solution to the First Order, Linear, Negative Feedback
Loop System

Exponential Decay
Figure 1 below is a system dynamics representation of a linear first order negative
feedback loop system with an implicit goal of zero. The figure includes the model's
equations, a causal loop diagram, and a simulation of the model's structure. The
simulation is an example of exponential decay behavior that corresponds to the
exact analytical solution to the system presented in Equation 2 of Goal Seeking
Behavior.
(Click on image to run simulation)

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Figure 1: First Order, Linear, Negative Feedback Loop System with an Implicit Goal of Zero

Measures of Exponential Decay: Half Life

One measure of how long it will take for a first order, linear, negative feedback
loop system to reach its goal of zero is its half life. The half life of such a system is
the time it takes to drain half of the contents from the system's stock. Analogous to
the case of the doubling time for a first order positive feedback loop system above,
the system's time constant must be determined before its half life can be found.
As was previously shown, the analytical solutions to Equations 1 of Exponential
Growth and Equation 2 of Goal Seeking Behavior differ only by sign. It should not
be surprising therefore that the equation for the outflow in Figure 1:
Flow = Stock / TimeCoef
or:
Flow = Stock * (1/TimeCoef)
is very similar to the equation for the inflow in the Figure 20 of Exponential
Growth:
Flow = Stock * Coef
Given that the time constant for the positive feedback loop system of Figure 20
of Exponential Growth is Tc = 1/Coef, and applying the same logic to the negative
feedback loop system presented in Figure 1, yields a time constant of T c = 1/
(1/TimeCoef) = TimeCoef. This result can be used to answer a question similar to
that asked about the positive feedback loop system: How much progress toward its
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goal will the negative feedback loop system have made after one time constant has
elasped? The answer can be found by substituting the time constant into
the Equation 2 of Goal Seeking Behavior:
Stockt = Stock0 * e-(1 / TimeCoef) *Tc
Stockt = Stock0 * e-(1/TimeCoef)*TimeCoef
Stockt = Stock0 * e-1
Stockt = Stock0 * (1/e)
Stockt = Stock0 * .37
This result indicates that the system loses 63% of the contents of its stock after one
time constant has elapsed. Extending this logic reveals that the system loses 86%
of the contents of its stock after two time constants have elasped (Stock t =
Stock0 * .37 * .37 = Stock0 * .14) and 95% of the contents of its stock after three
time constants have elapsed (Stockt = Stock0 * .37 * .37 * .37 = Stock0 * .05).
Figure 2 repeats the simulation from Figure 1 and confirms this result graphically.
As in the case of a first order positive feedback loop system, the negative loop
system's half life is 70% of its time constant. That is: T h = .7 * Tc. Once again, the
derivation of ths result is presented in the shaded box below for the more
methematically inclined reader. A graphical presentation of the result is also shown
in Figure 2.
(Click on image to run simulation)

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Figure 2: Behavior of a First Order, Linear, Negative Feedback Loop System after Three Time Constants have
Elapsed

The analysis of the first order negative feedback loop system with an implicit goal
of zero can be extended to the more general negative feedack loop model originally
presented in Figure 2 of Goal Seeking Behavior, giving the following insight: A
first order, negative, feedback loop system reaches approximately 95% of its goal
after three time constants have elapsed.
Derivation of the Half Life for a First Order, Linear, Negative Feedback Loop
System
The half life of a first order, linear, negative feeback loop system is calculated
usingEquation 2 of Goal Seeking Behavior. If the half life, Th, is defined to be the time it
takes to cut the initial value of a stock in half, then:
1/2 * Stock0 = Stock0 * e-1/Coef * Th
Since the system's time constant, Tc, is 1/Coef, then the system's Coef = 1/Tc. Thus:
1/2 * Stock0 = Stock0 * e-Tc * Th
Dividing both sides by Stock0 yields:
1/2 = e - Th/Tc
Taking the natural logarithm of both sides yields:
ln(1/2) = ln(e -Th/ Tc)
Or:
ln(1) -ln(2) = ln(e-Th/Tc)
Or:
0 - .69 = - Th / Tc
Or:
.7 = Th / Tc
Or:
Th = .7 * Tc

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Thus, the half life of a first order, linear, negative feeback loop system is seventy percent
of its time constant.

System Oscillation
System oscillation is the characteristic symptom of negative feedback structures in
which the information used to take goal-seeking action is delayed (See Figure 1).
In such cases, a control action is not based on the current state of a system but on
some previous state or value. As you can imagine, usingdated information to
control the approach to a target is likely to cause the system to miss or overshoot
its goal. Specific structural characteristics of a system, such as delay
duration and delay order, will determine whether the resulting oscillation will
diminish over time, reach some sustained amplitude and frequency, or experience
an increasing amplitude.

Figure 1: System oscillation is created when decision information in negative feedback structures is delayed.

Figure 2 shows a simple system in which the information about the current "level"
of the system variable first passes through a single stock/flow structure before
being used to take a controlling action (information path is shown in red). Thus, the
decision to take action by changing the variable, Action, is based not on the current
state of the system but on some previous value.

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Figure 2: Simple negative feedback structure with control information delay.

Given this structure, Figure 3 shows what happens if the goal, DesiredSystemLevel,
is increased by 5 units. Because of the delay, the system overshoots its target at
about time=6, reaches a maximum of 22 units at time=10, then undershoots at
about time=12, and so on. Eventually, the system does find its target 50 time units
after the goal changed!

Figure 3: A step increase in goal value causes a damped oscillation response in system.

Elephant-Hunter Model Example

Figure 4 presents a more complex example of a system that exhibits oscillatory
behavior. In this Elephant-Hunter Model, the conservation and health of the
elephant herd is directly dependent on the ability of the park manager to keep the
herd population below the carrying capacity of the land. Too many elephants will
result in long-term damage to the park's feed production capacity and ultimately
reduce the number of elephants that can be sustained.
(click on image to run simulation)

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Figure 4: Elephant-Hunter system structure.

One of the primary herd control "leverage points" in this system is to change the rate at which
elephants are "harvested" by increasing or decreasing the number of hunters. Keep in mind
that the elephant population level is a function of the elephant Net Birth Rate and the Harvest
Rate. Thus, by increasingthe hiring rate of hunters, the total number of hunters will increase.
An increase in the number of hunters will increase the elephant harvest rate. An increase in
harvest rate will "draw down" the level of elephants in the herd.
Consider a scenario in which the net birth rate of the elephant herd increases from 8 elephants
per year to 12 elephants per year. Due to inherent delays in herd data gathering and analysis
methods, this increase is not immediately detected. After some delay, the birth rate trends are
revealed and the manager decides to hire more hunters. However, because of the delays in
hiring, more time passes before the hunters are actually onboard. As the hunter population
increases, the harvest rate increases, which causes the herd population growth to slow, stop,
and eventually turn downward. Since the system delays are still in place, however, the herd
level continues to drop and eventually undershoots the target, prompting the manager to
reduce the number of hunters. This "trial and error "oscillating process continues until the
equilibrium target is reached, almost 20 time units from the initial step increase in birth rate!
Figure 5 and 6 shows the results of this scenario.

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Figure 4: Results of a step increase in elephant birth rate.

Types of Oscillations
Information delays are prevalent in the real world so it's no surprise that oscillations are the
most common dynamic behaviors. There are four basic types:

Sustained
Oscillation

Characterized by periodicity of one

Constant amplitude
No stable fixed equilibrium is reached

Damped
Oscillation

Amplitude of oscillation dissipates over time

Stable equilibrium is reached

Exploded
Oscillation

Not common in the real world

Amplitude increases over time
Growth either leads to a sustained pattern or deterioration of the
system

Chaos
Oscillation

Random time path that never repeats

Irregular amplitude and infinite period
Chaos oscillations may be found in many natural systems such as

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weather patterns

S-Shaped Growth
S-shaped growth is the characteristic behavior of a system in which a positive and
negative feedback structure fight for dominance but result in long-run equilibrium.
As illustrated in Figure 1, the positive feedback exponential growth loop (shown in
blue) initially dominates the system, causing the system variable to increase at an
increasing rate. However, as the system approaches its limit or "carrying capacity",
the goal-seeking negative feedback loop (shown in red) becomes the dominant
loop. In this new mode, the system approaches stasis asymptotically. This "shifting
dominance" event from one loop to another is characteristic of nonlinear behavior
and is found in a variety of physical, social, and economic systems.

Figure 1: S-Shaped structure and characteristic time path.

For this discussion, we revisit the elephant herd scenario to illustrate this behavior.
Figures 2 and 3 present our elephant population model in causal
diagram and simulation model form, respectively. Looking at Figure 2, we see that
the elephant herd system consists of one positive growth feedback loop and two
negative feedback loops.

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Figure 2: Causal diagram of the elephant population model.

(click on image to run simulation)

Figure 3: Simulation model of elephant herd growth model.

The positive Birth Rate loop, shown in blue, is responsible for the exponential
growth experienced during the early stages of herd growth. As the population of
the herd increases, the birth rate - given some Fecundity (fertility) constant increases. Increasing the birth rate further promotes the growth of the herd. In
balance, the negative Death Rate loop, shown in red, is responsible for drawing
down the herd population. On its own, the death rate of the elephant herd implicitly
reduces the population to zero. As elephants die, the population decreases until an
equilibrium population of zero is reached wherein no more elephants die. The
negative Carrying Capacity loop, shown in green, considers the effect of an
increasing population density on the average life span - and thereby the Death rate
- of the elephant herd. Here, the explicit goal of the system is determined by the
carrying capacity.
Given this structure, Figures 4 and 5 show the time series results from simulating
this model from time=0 to time=100. In Figure 4 ,we see the exponential behavior
of the birth rate from time=0 to about time=40. At time=40, the influence of an
increasing population density on the average life span begins to show with an
"upturn" in the rate of Deaths within the herd. After this point, the gap between
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Birth and Death rate gradually closes as the population density increases. At about
time=58, the Birth and Death rate become equal and the system achieves
equilibrium.

Figure 4: Time series plot of elephant herd Birth rate and Death rates.
To illustrate this behavior another way, Figure 5 shows a normalized time series plot of the
Elephant herd population and the Net Growth rate for the herd. Net Growth is defined as the
number of elephant births minus the number of elephant deaths. As we expect, initially the
Net Growth increases exponentially due to the dominance of the Birth rate loop. However,
we see a very specific shift at time=40 when the Net Growth peaks and begins to fall. As the
rate of death increases, the Net Growth decreases. The continued increase in Death rate
eventually brings Net Growth to zero, causing the system to reach steady state.

Figure 5: Normalized time series for Elephant population and Net Growth indicates
that shift occurs at maximum growth point.
Overshoot and Collapse
So far, we have considered a system in which the carrying capacity is constant. Now, let us
examine the case in which a system overshoots its limit, causing the carrying capacity itself
to change. In such cases, three outcomes are possible depending upon the specific structure of
the system. The system may:
o oscillate about its carrying capacity;
o overshoot and collapse in which case the carrying capacity is destroyed and the
system crashes; or
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o reverse direction and approach its carrying capacity in an s-shaped declining fashion.
In order to demonstrate overshoot and collapse behavior in our elephant model, we have to
add some structure. As shown in Figure 6, we assume that the system's carrying capacity is
actually a stock of resource, such as acres of grass and shrubbery, with some characteristic
yearly average output. If the herd population is below the land's ability to replenish itself,
then the carrying capacity is constant. However, if the consumption rate of the elephant herd
exceeds its steady state carrying capacity, then land's ability to regenerate is eroded by some
amount. The Erosion Rate in this case is defined as the number of elephants in the herd
multiplied by the yearly erosion rate per elephant.
(click on image to run simulation)

Figure 6: Elephant population model with variable carrying capacity.

Figure 7 shows the results of a simulation run from time=0 to time=100 with an initial herd
population of 50 elephants. In this case, the herd exceeds the initial Carrying Capacity at
about time=20. After some delay, this excess number of elephants begins to erode the
Carrying Capacity. Since the Carrying Capacity serves as the target in this negative feedback
system, the Elephant population responds in kind by reversing its exponential growth and
follows the Carrying Capacity downward. Note that even when the population drops to 200
animals, the initial Carrying Capacity, it remains greater than the now decreasing Carrying
Capacity, thus the process continues until the system crashes and the Carrying Capacity of the
land becomes zero.

Figure 7: Results from Elephant population overshoot scenario.

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There is more to modeling than just being able to build a model on a computer. Ultimately the goal
of building a system dynamics model is to improve the way that people understand systems and
improve their decision making. In this chapter, we share some thoughts and ideas about the process
of creating system dynamics models and how these models can be used to test options through
computer simulation "experiments."

The Modeling Process

The goal of any modeling effort is to understand
and explain the behavior of a complex system
over time. As we discussed in the previous
chapters,
knowing
a
system's patterns
of
behavior speaks volumes about
structure. For a decision maker,
understanding the structure of a
is a critical first step in designing
implementing effective policy.

its
system
and

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There are two ways in which a system dynamics model can aid in understanding
complex problems. A completed model can be used to test alternative policy options
(i.e. conduct experiments). However, it should be noted that there is great benefit to
participating in the model building process itself. Practitioners have found that longterm learning tends to come from the model building process, so it is important to
involve the decision maker from the beginning.
With this in mind, we can think of the modeling process as having the following
steps:
1. Identify Problem
2. Develop Hypothesis
3. Test Hypothesis
4. Test Policy Alternatives

Identify "SD" Problem

One of the early lessons learned in building system dynamics models is the
importance of modeling a problem rather than an entire system. Focusing on
a particular problem provides a boundary to the modeling process and forces
the modeler to consider only system variables that relate specifically to the
problem in question. Although your understanding of the real problem might
change as the process unfolds, it is still critical to begin with a focused
problem statement.
Develop Hypothesis (mapping mental models)
With a clearly defined problem statement in hand, the first model building step is to
develop a theory of why the system is behaving the way that it is. Tools such as causal
loop diagrams and stock and flow networks can be used to map out a set of
assumptions about what is causing the "reference modes" of the system to behave a
particular way. Although the actual process of developing this theory (causal diagram)
varies from person to person, we summarize the basic steps (See box below) in the
process as a general guide.

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List system variables that are directly

relevant to the problem statement. For example, if the
problem statement is related to a manufacturing firm's loss in
profits, one might list variables such as: unit cost, sales,
number of employees, product quality, inventory, order
backlog, competitor price, etc.

Link the variables listed in step 1 by using

the casual diagramming convention discussed in Chapter 3.
For each connection, note whether the relationship between
the variable pair is positive or negative. As the diagramming
process unfolds, feel free to add or drop variables as needed.
However, throughout the process, hold the problem statement
in clear view.

As the diagram evolves, study the feedback

"loop" structures that form. Identify and label each feedback
loops as areinforcing or balancing loop.

This is an important stage to collect information about the problem through

brainstorming with groups, data, literature, and of course, personal experience.

Test Hypothesis (challenging mental

models)
Once you have developed a pen and paper
theory about the system it is time to
develop a computer model of your theory
to see if it will re-create the behavior over
time seen in the reference modes. The
mathematical representation requires a deal
of precision around the relationships
between different elements in the system.
Being forced to shape a consistent
mathematical model of a system often
challenges and evolves our own mental
model assumptions of how we thought it
worked. Before each simulation run of the
model, think through how you expect the model to behave. If it behaves differently, it
either means something is wrong in the model or you have just discovered an
opportunity to challenge your mental model!

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Test Policies
(improving mental
models)
With a basic model that
seems to be able to
explain why the problem
is behaving the way that it
is, you can look for policy
interventions that lead to
more desirable long term
system behaviors. A good
way to start this process is
to first identify the key
decisions
(critical
decisions/policies that the
organization
makes),
indicators (what you need to see from the system to assess the decision), and
uncertainties (most fragile assumptions about the relationships or outside world)
associated with the problem. Then try out different possible sets of decisions under
different assumptions about the uncertainties. Look for tradeoffs between short term
behavior and long term behavior.

Management Flight Simulators

Through the process of developing a system dynamics model, the modeler has
created a complex map of interrelationships and a better understanding of how the
system will behave over time under different policy scenarios. One of the great
challenges of developing models is in trying to communicate the insights gained to
people who did not develop the model. Presenting a report to a manager of all the
things he or she should do differently from what someone else has learned in a
model works only if the conclusions of the model were what they were planning to
do in the first place.
But a model can provide more than just bullet point conclusions, it can also be
used to create a simulated "practice field" where these managers and other people
can try managing the system by making decisions themselves. We call these
simulated worlds management flight simulators. Through these simulators they can
learn about the model of the system and improve their own assumptions about the
short and long term effects of different decisions.
In a management flight simulator, users of the model are placed in the position of
managing the system. Each year (or month, or quarter) they must make decisions
to try to meet some goal in the system. To help with this, a snazzy interface is
typically run "on top of" the system dynamics model that makes the information
more accessible. Generally, there are four kinds of information presented:
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o Decisions - There are typically four to six key management decisions the
user must make, using the knobs, dials, and/or input boxes presented on the
screen.
o Reports - They provide the critical "snap-shot in time" to inform the users
about the state of the system.
o Graphs - During a model simulation, time series graphs allow the user to
study system trends. As discussed earlier, studying the shape of a
system's time paths is an important part of understanding the structure that
lies beneath.
o Initial Conditions - Because of the nature of system dynamics models,
there are usually one or more key uncertainties that significantly impact the
behavior of the simulation run. It is important to allow the user to set the
value of these uncertainties as part of the experimentation process. An
important part of model design and use is making hidden assumptions and
parameters visible!
Management Flight Simulation Example
The Product Development Flight Simulator was developed by Daniel Kim and Don Seville at
the Organization Learning Center at MIT to teach users the dynamics and highly complex
nature of the product development cycle. The user had three primary objectives or
requirements:
o The product must be finished on schedule.
o The product must be developed using a limited pre-defined budget.
o The product must be of sufficient quality to compete in a competitive market.
For this simulator, the product development project was separated into two categories of
tasks: product engineering tasks (100 total tasks to complete), and process engineering tasks
(100 total tasks to complete). Each category represented a stock of work (tasks) that would be
drawn down at a particular work rate. The product engineers (PE) were responsible for
product design and testing. Process engineers (PcE) were responsible for designing and
building the manufacturing process to turn the design into a marketable product.
Figure 1 shows the basic layout of the product development flight simulator. During the
simulation, each stock of work was gradually drawn down as the engineers worked.
Regardless of whether all the engineering design and process work was completed, the
product was manufactured and released into the market on the scheduled day. If the all or a
majority of the work was completed, the quality of the product was high. However, if a
significant amount of tasks remained, then the quality of the product was low on the day of
release. Product sales depended heavily on whether the product was released by the target
release date and was of a competitive quality.
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Figure 1: Basic Layout of the Product Development Flight Simulator

As the "pilot" of this simulator, each week of the simulation the user was expected to decide
how many engineers to hire or layoff, the number of work hours in a week, the scheduled
completion date for each team, the amount of time spent coordinating between the two teams,
and the quality "target" for the product. The choice for each of the system variables
influences the rate at which the engineers accomplish their work, the resulting quality level,
and the rate of engineer attrition due to stress and fatigue.
In this case, the flight simulator served as a laboratory in which a wide variety of different
management strategies could be tested. More importantly, the consequences of various

strategies could be explored systematically without risking "trial and error"

learning on the real firm!
Just for fun
In the box below, we provide you an opportunity to try out a sample simulator
yourself. After reading the brief introduction to our Rocket Simulator, feel free to
run the simulator by clicking on the animated figure.

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Rocket Simulator is a simple system dynamics model that simulates the motion of a rocket
being launched from a planet's surface. We used a system dynamics stock and flow structure
to describe abody in motion such as a rocket or an automobile in terms of its mass,
acceleration, velocity, distance traveled, and the forces acting on it. The figure on the right
shows the basic structure of the rocket simulation model. As the pilot, you control two of the
simulation model's parameters: the throttle and direction. The THROTTLE controls the
rocket's thrust and fuel burn rate. The ROCKET ANGLE controls what direction the rocket is
pointing. This simulation uses simple equations of motion to teach concepts of accumulation
and system delay as well as demonstrate how even simple systems can behave in a complex
and non-intuitive way.
(click on image below to run simulation)

As we discussed in the System Dynamics and Energy Modeling section, one of the system dynamics
analyses conducted in support of the world modeling efforts was a natural gas discovery and
production model created by MIT Master's student Roger Naill. Naill based his model on the life
cycle theory of oil and gas discovery and production put forth by petroleum geologist M. King
Hubbert. Like Hubbert, Naill assumed for his analysis that the total amount of oil and gas in the
United States (i.e., the amount of oil and gas "in place"), and hence the "ultimately recoverable"
amount of oil and gas in the United States, is
finite.
In this chapter, we recreate Naill's
original Natural Gas Discovery Model as a
case study in how to construct and
experiment with system dynamics models.
To make the explanation of the model more
manageable, we present a series of model
versions, each version incrementally more
complex with the addition of new structure.
In each case, the reader is encouraged to run the model to see how the additional structure affects its
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behavior. In the final section of this chapter, we present a "flight simulator" version of the completed
model. The reader is encouraged to conduct policy experiments by changing decision variables or
model uncertainty variables to see how the behavior of the system changes in response.

Natural Gas Discovery Model: Reference Modes

It is often argued that system dynamics modeling is mis-named because system dynamicists
model problems, not systems. The reason that problems, rather than systems, are focused on
is because they direct the system dynamicist away from the "kitchen sink approach" to
modeling, which usually yields a model containing so much detail that it is no more easy to
understand than the actual system itself.
The principle way that system dynamicists force themselves to focus on problems is through
the use of reference modes. Reference modes are time series graphs of important system
variables that exhibit patterns of behavior (e.g., exponential growth, exponential
decay, oscillation, s-shaped growth, overshoot and collapse ) that are either problematic or
not well understood. They also define the time horizon of a model, which involves the
specification of both its time units (years, quarters, months, weeks, days, etc.) and time span
(the models start time and stop time). The task of the system dynamicist is to identify, and
include in the model, only those variables that help to explain (i.e., help the model to mimic)
the reference modes.
The reference modes originally used by Roger Naill in the construction of his natural gas
model were drawn from the oil and gas life cycle theory of M. King Hubbert. Hubbert based
his theory on the knowledge of the physical structure of the oil and gas system and hence on
the assumption that there is a finite amount of oil and gas in the earth. According to Hubberts
theory, the discovery and production flows of natural gas, as well as the stock of proven
reserves of natural gas rise, peak and fall over time, and the stock of unproven resources falls
monotonically due to depletion.
Although a theory can be used to provide reference modes for a system dynamics model,
actual numerical time series data, if available, can also be used. Figure 1 presents some actual
data from the U.S. natural gas system. It includes the actual discovery rate, usage
(production) rate, proven reserves, and reserve-production ratio. Clearly, these data do not
span the entire life cycle of the natural gas system (roughly the years 1900 to 2050) a la
Hubbert, so they are of limited use in specifying reference modes for the natural gas depletion
problem. On the other hand, they can be used to complement the reference modes resulting
from Hubberts theory and to calibrate the model.

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Figure 1: Actual Data from the U.S. Natural Gas Discovery and Production System

Step-By-Step Re-Creation of the Natural Gas Discovery and

Production Model
A good way to gain an understanding of a system dynamics model created by another person,
is through a step-by-step replication of its structure. In this section, Roger Naill's model of
U.S. natural gas discovery and production will be recreated through a series of increasingly
sophisticated system dynamics models. To augment the discussion, you can
access and run each model version directly. Simulating the models will
allow you to see the effect of adding complexity to the base model
structure.

Natural Gas Discovery and Production Model: First Cut

Figure 1 is the stock-flow diagram for the first step in the recreation of Naills model of U.S.
natural gas discovery and production. The model consists of two stocks: UnprovenReserves
and ProvenReserves, and two flows: DiscoveryRate and UsageRate. The UsageRate is
roughly equivalent to the rate of production of U.S. natural gas.
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One feature of the model that is particularly noteworthy is that there is no inflow to the stock
of UnprovenReserves. This is because natural gas is created in geologic time, yet used on a
human time scale of a hundred years or so. Thus, for all practical purposes, the amount of
natural gas in the United States can be treated as fixed. Naill made this assumption because
he based his model on the resource life cycle theory of M. King Hubbert. A fixed stock of gas
or oil is at the core of Hubberts theory.

Figure 1: First Cut of Naills Model of U.S. Natural Gas Discovery and Production

Note: Click on rotating icon to access first cut of the Natural

Gas Discovery Model.

Figure 2 lists the system dynamics equations that directly correspond to the icons shown in
Figure 1. Three features of these equations are important to note. The first is that the variables
on the left hand side of each equal sign have their measurement units enclosed in brackets {}.
In system dynamics modeling stocks are measured in "units" and flows are measured in
"units/time." In Figure 2, each of the stocks is measured in "Cubic Feet" of gas and each of
the flows is measured in "Cubic Feet (of gas)/Year."
In system dynamics modeling, each of the equations in a model must be "dimensionally
correct." This means that the arithmetic of the units of measurement must be correct. For
example, if a flow {units/time} is equal to a stock {units} divided by a constant, the
constant must be measured in {time}. Inspection of the equations in Figure 2 reveals that they
are all dimensionally correct.
The second feature of the equations in Figure 2 is that the stocks each have initial values.
More specifically, the initial amount of gas in the stock of UnprovenReserves is 6.4*e12
cubic feet and the initial amount of gas in the stock of ProvenReserves is 1.28434*e15 cubic
feet. The initial values of stocks in system dynamics models can be determined in a variety of
ways. The values are often known or knowable and the analyst needs only to investigate
available data sources to find out. In the case of Naills model presented here, the initial
values were estimated by using the system dynamics software to calculate the "best fit" to
actual U.S. natural gas discovery and production data. In the case of UnprovenReserves, a
value estimated by Hubberts method could also have been used.

The third feature of the equations in Figure 2 is that both of the flows have first
order control. This means that a negative or balancing feedback loop has been
created between each stock and its outflow to prevent the stocks from ever taking
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on negative values (because "negative UnprovenReserves" and "negative

ProvenReserves" would not make sense). An examination of the equations reveals that, when
either UnprovenReserves or ProvenReserves reach a value of zero, their outflows are shut off
(i.e., take on values of zero).

[Stock] ProvenReserves
{Cubic Feet}

= dt*(DiscoveryRate - UsageRate

[Initial] ProvenReserves
{Cubic Feet}

= 6.4e12

[Stock] UnprovenReserves
{Cubic Feet}

= dt*(-DiscoveryRate)

[Initial] UnprovenReserves
{Cubic Feet}

= 1.28434e15

[Flow] DiscoveryRate
{Cubic Feet/Year}
[Flow] UsageRate
{Cubic Feet/Year}

= UnprovenReserves*DiscoveryCoef

= ProvenReserves*UsageCoef

[Constant]
{1/Years}

DiscoveryCoef = .0075

[Constant]
{1/Years}

UsageCoef = .02

Figure 2: Equations from the First Cut of Naill's Model of U.S. Natural Gas Discovery and Production

Figure 3 shows time series plots from a simulation of the model presented in Figures 1 and 2.
Of note is that, even at this very early stage in the models development, it produces dynamic
behavior consistent with the real system. UnprovenReserves fall monotonically due to
depletion and ProvenReserves rise during the early part of the century, peak during the mid1970s, and then decline thereafter. The DiscoveryRate falls monotonically and the UsageRate
(essentially the production rate) rises from 1900 to the mid-1970s, peaks, and then declines
thereafter.

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Figure 3: Time Series Plots from a Simulation of Naills Model of U.S. Natural Gas Discovery and Production

Natural Gas Discovery and Production Model: Second Cut

Figures 4(a) and 4(b) illustrate the stock-flow and causal diagrams for the second step in the
recreation of Naills model of U.S. natural gas discovery and production. The model is merely
an extension of the model presented in Figure 1.

Figure 4(a): Second Cut of Naills Model of U.S. Natural Gas Discovery and Production

Figure 4(b): Causal Diagram the the Second Cut of Naill's Model
of U.S. Natural Gas Discovery and Production.

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Note: Click on rotating icon to access second cut of the

Natural Gas Discovery Model.

A comparison of Figure 4(a) to Figure 1 reveals that the right-hand side of the model
(ProvenReserves, UsageRate, UsageCoef) has not changed. The left-hand side of the model,
on the other hand, has had a significant piece of system dynamics structure added to it. More
precisely, the simple discovery rate equation has been replaced by a balancing feedback
loop (negative feedback) that works its way through the fraction of unproven reserves
remaining and the cost of exploration.
Refering to Figure 4(b), the logic of the balancing loop is as follows: a fall in unproven
reserves (UnprovenReserves), ceteris paribus, causes a fall (i.e., a move in the Same
direction) in the fraction of unproven reserves remaining (FracRemaining). A fall in the
FracRemaining, ceteris paribus, causes a rise (i.e., a move in the Opposite direction) in the
effect of the fraction remaining on the cost of exploration (EffFracRemainCost). A rise in the
EffFracRemainCost, ceteris paribus, causes a rise in the cost of exploration
(CostOfExploration). A rise in the CostOfExploration, ceteris paribus, causes a fall in the
indicated discovery rate (IndicDiscovRate) which, in turn, ceteris paribus, causes a fall in the
discovery rate (DiscoveryRate). A fall in the DiscoveryRate closes the loop and
ensures, ceteris paribus, that unproven reserves will be higher than they otherwise would
have been.
Three other features of the model presented in Figure 4a are important to note. The first is
that the balancing loop preserves first order control in the model. That is, although the
feedback from the stock of unproven reserves to its outflow (DiscoveryRate) is not direct as it
was in the first cut of the model, the equations in the loop still causes the computer to shut-off
the discovery rate when the stock of unproven reserves is zero.
The second feature of the model presented in Figure 4a that is important to note is
the delay symbol that appears in the discovery rate icon. The purpose of embedding a delay
in the discovery rate is to account for the lag that exists between the time a decision is made
to invest in gas exploration and the time actual gas discoveries occur. This delay could also
have been modeled explicitly with a simple stock and flow stucture.
The last feature of the model that is important to note is its table functions. Represented by
the zig-zag-like symbols, table functions allow the modeler to externally impose
relationships(linear and nonlinear) between system variables.
Figure 5 lists the system dynamics equations that directly correspond to the icons shown in
Figure 4. Three characteristics of these equations are particularly noteworthy. The first is that,
in
addition
to
the stocks(rectangles), flows (pipe
and
faucet
assemblies)
and constants (diamonds) presented in the first cut of the model, there are now auxiliary
equations (circles) in the model.
The second noteworthy characteristic is that the model is again dimensionally correct. In
particular, the measurement units of each variable in the balancing loop correspond to the
arithmetic embodied in each equation in the loop. To provide just one example, the indicated

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discovery rate (Cubic Feet/Year) is equal to investment in exploration (Dollars/Year) divided

by the cost of exploration (Dollars/Cubic Foot).
The third noteworthy characteristic is that two of the auxiliaries contain table functions
(EffFracRemainCost and InvestInExplor) in nongraphical form. The graphical versions of
these functions are shown in Figure 6.

[Stock] ProvenReserves
{Cubic Feet}

= dt*(DiscoveryRate - UsageRate)

[Initial] ProvenReserves
{Cubic Feet}

= 6.4e12

[Stock] UnprovenReserves
{Cubic Feet}

= dt*(-DiscoveryRate)

[Initial] UnprovenReserves
{Cubic Feet}

= 1.28434e15

[Flow] DiscoveryRate
{Cubic Feet/Year}
[Flow] UsageRate
{Cubic Feet/Year}

= DELAYINF(IndicDiscovRate,4.5,3)

= ProvenReserves*UsageCoef

CostOfExploration =
NrmCostExploration*EffFracRemainCost
[Aux]

{Dollars/Cubic Foot}

EffFracRemainCost = GRAPH(LN(10*FracRemaining),3.5,0.5,[13000,6000,2700, 1000,545,245,110,50,

22,9.98,4.48,2.02,0.91"Min:0;Max:13000;Zoom"])
[Aux]

{Dimensionless}

FracRemaining =
UnprovenReserves/INIT(UnprovenReserves)
[Aux]

{Dimensionless}
[Aux] IndicDiscovRate
{Cubic Feet/Year}

= InvestInExplor/CostOfExploration

InvestInExplor = GRAPH(TIME,1900,15,
[100000000,220000000,350000000,470000000,
600000000,720000000,820000000,900000000,950000000,9900
00000, 1000000000"Min:0;Max:1000000000;Zoom"])
[Aux]

{Dollars/Year}
[Constant] NrmCostExploration
{Dollars/Cubic Foot}
[Constant]
{1/Years}

= 1.34775e-5

UsageCoef = .02

Figure 5: Equations from the Second Cut of Naills Model of U.S. Natural Gas Discovery and Production

120

An examination of Figure 6 reveals that the table functions both represent nonlinear
relationships in the model and help to define the systems limits. The effect of the fraction of
gas remaining on the exploration cost function (EffFracRemainCost) indicates that as gas
depletion occurs, the cost of gas exploration increases monotonically. The investment in
exploration function (InvestInExplor) indicates that, over time, the number of dollars per year
allocated to gas exploration increases and then saturates. In future cuts of the model, this
relationship will be made endogenous.

Figure 6: Table Functions in the Second Cut of Naills Model of U.S. Natural Gas Discovery and Production

Figure 7 shows time series plots from a simulation of the model presented in Figures 4 and 5.
As with the previous version of the model, this cut produces dynamic behavior consistent
with the real system. That is, the UsageRate again rises from 1900 to the mid-1970s, peaks,
and then declines. UnprovenReserves again fall monotonically due to depletion and
ProvenReserves again rise during the early part of the century, peak during the mid-1970s,
and then decline.
The only behavior in this version of the model that is new involves the DiscoveryRate. A
comparison of Figures 3 and 7 reveals that the DiscoveryRate now rises and falls whereas, in
the previous version of the model, it simply fell monotonically. The reason for this difference
is that, in this cut of the model, the InvestInExplor table function exogenously increases
investment in exploration over time. Early in the systems evolution, the increasing amount of
investment dollars causes a rise in natural gas discovery. Later on, however, the effects of
depletion overwhelm the investment dollars and the discovery rate falls. An interesting
simulation experiment that could be done is to systematically alter the InvestInExplor
function (its shape, its saturation level, etc.) and resimulate the model to ascertain the results
of the changes.

Natural Gas Discovery and Production Model: Third Cut

Figure 8(a)and 8(b) correspond to the stock-flow and causal diagram for the third
step in the re-creation of Naills model of U.S. natural gas discovery and
production. The model is a direct extension of the model presented in Figures 4
and 5. Four significant changes were made to the second cut of Naill's model in
order to arrive at this version of the natural gas system:
121

 a balancing feedback loop was added;

a positive or reinforcing feedback loop was added;
an exogenous exponentially growing demand for natural gas was
added; and
an exogenously growing price of natural gas was added.

Figure 8(a): Third Cut of Naills Model of U.S. Natural Gas Discovery and Production

122

Figure 8(b): Causal Diagram of additional balancing and reinforcing loops.

Note: Click on rotating icon to access third cut of the Natural

Gas Discovery Model.

The logic of the balancing loop, shown in red, is as follows. A fall in

UnprovenReserves, ceteris paribus, causes a fall in FracRemaining. A fall in the
FracRemaining, ceteris paribus, causes a rise in the EffFracRemainCost. A rise in the
EffFracRemainCost, ceteris paribus, causes a rise in the CostOfExploration. A rise in the
CostOfExploration, ceteris paribus, causes a rise in the total cost of natural gas (TotalCost). A
rise in the TotalCost, ceteris paribus, causes a fall in the ratio of gas price to gas cost
(PriceCostRatio). A fall in the PriceCostRatio, ceteris paribus, causes a fall in the effect of
return on investment in exploration (EffROIExplor). A fall in EffROIExplor, ceteris paribus,
causes a fall in InvestInExplor. A fall in InvestInExplor, ceteris paribus, causes a fall in the
IndicDiscovRate which, in turn, ceteris paribus, causes a fall in the DiscoveryRate. A fall in
the DiscoveryRate closes the loop and ensures, ceteris paribus, that unproven reserves will be
higher than they otherwise would have been.
The logic of the reinforcing loop,shown in blue, is as follows. A rise in proven reserves
(ProvenReserves), ceteris paribus, causes a rise in the natural gas usage rate (UsageRate). A
rise in the UsageRate, ceteris paribus, causes a rise in revenue from the sales of natural gas
(SalesRevenue). A rise in SalesRevenue, ceteris paribus, causes a rise in InvestInExplor. A
rise in InvestInExplor, ceteris paribus, causes a rise in the IndicDiscovRate. A rise in the
IndicDiscovRate, ceteris paribus, causes a rise in the DiscoveryRate which, in turn, ceteris
paribus, closes the loop and causes a rise in ProvenReserves.
An examination of Figure 9 reveals that the equations are dimensionally correct and that the
exogenous rate of exponential growth in gas demand (GrowthConstant) is approximately
4.5% per year. Further, the average wellhead price of gas (AveWellHeadPrice) is determined
exogenously via a table function loaded with year-by-year data. Although these data are
123

synthetic, actual price data could have been used to determine its effect on the natural gas
system.

[Stock] ProvenReserves = dt*(DiscoveryRate - UsageRate) {Cubic Feet}

[Init] ProvenReserves = 6.4e12 {Cubic Feet}
[Stock] UnprovenReserves = dt*(-DiscoveryRate) {Cubic Feet}
[Init] UnprovenReserves = 1.28434e15 {Cubic Feet}
[Flow] DiscoveryRate = DELAYINF(IndicDiscovRate,4.5,3) {Cubic Feet/Year}
[Flow] UsageRate = UnRegUsageRate {Cubic Feet/Year}
[Aux] AveWellHeadPrice = GRAPH(TIME,1900,1,[0.00008,0.0000825, 0.000162,0.000335,0.000431, 0.000458,
0.000461,0.000455,0.000446,0.000436, 0.000425,0.000412,0.000399,0.000383,0.000366,
0.000346,0.000323,0.000297,0.00027, 0.000245,0.000226,0.000214,0.000208,0.000207,
0.000209,0.000211,0.000213,0.000213, 0.000213,0.000212,0.000209,0.000205,0.000201, 0.000196,
0.000191,0.000186,0.000182, 0.000179,0.000178,0.000179,0.000181,0.000185, 0.00019,0.000196,0.000202,0.000207,
0.000212,0.000216, 0.000219,0.000221,0.000223, 0.000224,0.000225,0.000226,0.000226, 0.000228,0.00023,
0.000233,0.000237,0.000243, 0.00025, 0.000259,0.00027,0.000281, 0.000294,0.000307,0.000321,0.000334,0.000348,
0.000362,0.000375, 0.000387,0.000399, 0.00041,0.000422, 0.000434,0.000447,0.000463, 0.00048, 0.000499,
0.000521,0.000545, 0.000569,0.000593, 0.000619,0.000646,0.000677, 0.000714,0.00076,0.000815,0.000881,
0.000952,0.001027, 0.001103,0.001177,0.001246, 0.00131, 0.001369,0.001423,0.001476, 0.001529,0.001585,
0.001649,0.001723,0.001815, 0.001931,0.002074,0.002241,0.00242, 0.002594,0.002757, 0.002909,0.003051, 0.003186,
0.003319,0.003455, 0.003597,0.003751, 0.003918,0.004101,0.0043,0.004519, 0.004761,0.00503,0.005327,0.005646,
0.005974,0.006294, 0.006593,0.006867, 0.007122,0.007365,0.007602,0.007842, 0.008093,0.008367,0.008673,0.009018,
0.009406,0.009828,0.010258,0.010669,0.011039, 0.011362,0.011652, 0.011916,0.012156, 0.012375,
0.012582,0.012791,0.013028"Min:0;Max:0.015;Zoom"]) {Dollars/Cubic Foot}
[Aux] CostOfExploration = NrmCostExploration*EffFracRemainCost {Dollars/Cubic Foot}
[Aux] EffFracRemainCost = GRAPH(LN(10*FracRemaining),-3.5,0.5,[13000,6000, 2700,1000,545,245,110,50,22,
9.98,4.48,2.02,0.91"Min:0;Max:13000;Zoom"]) {Dimensionless}
[Aux] EffPriceDemand = GRAPH(LN(AveWellHeadPrice*1e5),1,0.5,
[2.1,1.59,1.21,0.9,0.69,0.5,0.24,0.14,0.067,0.031,0.014,0.0055, 0.0015,0.0002,0.000017,0"Min:0;Max:2.1;Zoom"])
{Dimensionless}
[Aux] EffROIExplor = GRAPH(PriceCostRatio,0,0.2, [0,0.08,0.25,0.44,0.55,0.67,0.76,0.82,0.88,0.92,
0.96,1"Min:0;Max:1;Zoom"]) {Dimensionless}
[Aux] FracRemaining = UnprovenReserves/INIT(UnprovenReserves) {Dimensionless}
[Aux] IndicDiscovRate = InvestInExplor/CostOfExploration {Cubic Feet/Year}
[Aux] InvestInExplor = SalesRevenue*PctInvestExplor*EffROIExplor {Dollars/Year}
[Aux] PotentialUsageRate = InitUsageRate*EXP(GrowthConstant*(TIME-StartYear)) {Cubic Feet/Year}
[Aux] PriceCostRatio = AveWellHeadPrice/TotalCost {Dimensionless}
[Aux] SalesRevenue = UsageRate*AveWellHeadPrice {Dollars/Year}
[Aux] TotalCost = CostOfExploration*CostMargin {Dollars/Cubic Foot}
[Aux] UnRegUsageRate = PotentialUsageRate*EffPriceDemand {Cubic Feet/Year}
[Constant] CostMargin = .967118 {Dimensionless}
[Constant] GrowthConstant = .0463497 {1/Years}

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[Constant] InitUsageRate = 1.06331e12 {Cubic Feet/Year}

[Constant] NrmCostExploration = 1.34775e-5 {Dollars/Cubic Foot}
[Constant] PctInvestExplor = .2 {Dimensionless}
[Constant] UsageCoef = .02 {1/Years}

Figure 9: Equations from the Third Cut of Naills Model of U.S. Natural Gas Discovery and Production

Figure 10 shows time series plots from a simulation of the model presented in Figures 8 and
9. As with previous versions of the model, this cut produces dynamic behavior that is roughly
consistent with the real system. The only behavior in this version of the model that is new is
that of ProvenReserves. This time they rise and plateau, instead of rising, peaking, and
falling. This behavior is clearly not correct and must be fixed in later versions of the model. It
occurs in this version because, during the last third of the simulation, the exogenously rising
price of natural gas reduces the UsageRate to the (very low and falling) DiscoveryRate. This
can be seen by inspecting the top-right plot of Figure 10.

Figure 10: Time Series Plots from a Simulation of the Third Cut of Naills Model of U.S. Natural Gas Discovery
and Production

125

Figure 7: Time Series Plots from a Simulation of the Second Cut of Naills Model of U.S. Natural Gas
Discovery and Production

Natural Gas Discovery and Production Model: Fourth Cut

Figures 11(a) and 11(b) illustrate the stock-flow and causal diagrams for the fourth step in the
re-creation of Naills model of U.S. natural gas discovery and production. Figure 12 lists the
corresponding equations for Figure 11(a) can be accessed by clicking directly on the diagram.
The model has been extended through the addition of a balancing loop and a reinforcing
feedback loop.

126

(click on diagram to view equations)

Figure 11(a): Fourth Cut of Naills Model of U.S. Natural Gas Discovery and Production.

127

Figure 11(b): Causal Diagram of the Fourth Cut of Naill's Model

of U.S. Natural Gas Discovery and Production.

Note: Click on rotating icon to access fourth cut of the

Natural Gas Discovery Model.

The logic of the balancing loop (shown in red) is as follows. A rise in

ProvenReserves, ceteris paribus, causes a rise in the reserve-production ratio (ResProdRatio),
which is the number of years proven reserves will last, given the usage rate. A rise in the
ResProdRatio, ceteris paribus, causes a rise in the relative reserve-production ratio
(RelResProdRatio), which is a ratio of the reserve-production ratio to its desired value. A rise
in the RelResProdRatio, ceteris paribus, causes a fall in the percent of sales revenue devoted
to investment in gas exploration (PctInvestExplor). A fall in the PctInvestExplor, ceteris
paribus, causes a fall in InvestInExplor. A fall in InvestInExplor, ceteris paribus, causes a fall
in the IndicDiscovRate. A fall in the IndicDiscovRate, ceteris paribus, causes a fall in the
DiscoveryRate which, after a significant delay, closes the loop and ensures, ceteris paribus,
that proven reserves will be lower than they otherwise would have been.
The logic of the reinforcing loop (shown partially in blue) is as follows. A rise in
ProvenReserves, ceteris paribus, causes a rise in the natural gas usage rate (UsageRate). A
rise in the UsageRate, ceteris paribus, causes a rise in the ChgAveUsageRate, which is a flow
that changes the average usage rate (AveUsageRate). A rise in the ChgAveUsageRate, ceteris
paribus, causes a rise in the AveUsageRate. A rise in the AveUsageRate, ceteris paribus,
causes a fall in the ResProdRatio. A fall in the ResProdRatio, ceteris paribus, causes a fall in
128

the RelResProdRatio. A fall in the RelResProdRatio, ceteris paribus, causes a rise in the
percent of sales revenue devoted to investment in gas exploration (PctInvestExplor). A rise in
the PctInvestExplor, ceteris paribus, causes a rise in InvestInExplor. A rise in
InvestInExplor, ceteris paribus, causes a rise in the IndicDiscovRate. After a significant delay,
a rise in the IndicDiscovRate, ceteris paribus, causes a rise in the DiscoveryRate, which
closes the loop and ensures, ceteris paribus, that proven reserves will be higher than they
otherwise would have been.
Figure 13 shows time series plots from a simulation of the model presented in Figures 11. A
comparison with Figure 10 reveals that the model now exhibits two new behaviors. The first
is an oscillation that is most apparent in the plots of proven reserves, the discovery rate, and
the usage rate. The second is that proven reserves now rise, peak and fall, instead of merely
rising and peaking as in the last version of the model.
The models oscillatory behavior can be readily explained. A rule of thumb in system
dynamics modeling is that oscillation is caused by a balancing feedback loop with delayed
corrective action. The balancing loop (negative feedback) that was added to this version of
the model provides precisely this type of structure. That is, the model adjusts its investment
in exploration by watching its reserve-production ratio. When proven reserves drop and the
reserve-production ratio falls below its desired level, more revenue is invested in exploration.
When proven reserves rise and the reserve-production ratio exceeds its desired level,
investment in exploration falls. Because of the significant delay between the time a monetary
investment in exploration is made and the time natural gas discoveries occur, by the time new
proven reserves are added to ProvenReserves, they are no longer the amount necessary to
bring the reserve-production ratio into line with its desired value. As a result, the model must
again adjust its investment in exploration via the balancing loop. The system ends-up out of
sync -- over and undershooting its desired reserve-production ratio.

129

Figure 13: Time Series Plots from a Simulation of the Fourth Cut of
Naills Model of U.S. Natural Gas Discovery and Production

130

Natural Gas Discovery and Production Model: Fifth Cut

Figure 14(a) and 14(b) illustrate the fifth step in the recreation of Naills model of U.S.
natural gas discovery and production. Figure 15 shows the equations corresponding to the
simulation model. To view Figure 15, click directly on the stock-flow diagram. The main
additions to the model are pieces of system dynamics structure that enable the system to
determine the price of natural gas endogenously, rather than exogenously, as in past versions
of the model. At present, this pricing structure assumes that natural gas prices are not
regulated. The way that this constraint can be relaxed will be addressed in the next version of
the model.
(click on figure to view equations)

Figure 14(a): Fifth Cut of Naill's Model of U.S. Natural Gas Discovery and Production

131

Figure 14(b): Causal Diagram of additional balancing and reinforcing loops for Cut 5 model.

Note: Click on rotating icon to access fifth cut of the Natural

Gas Discovery Model.

The addition of an endogenous pricing structure creates four new feedback loops in the
model. Two of the loops are reinforcing loops (positive feedback) and two are balancing
loops (negative feedback). These loops can be identified in Figure 14, wholly or partially, via
information links of different colors.
The first new loop (shown with red information links) is a reinforcing loop. This loop works
through gas price and hence sales revenue to keep gas discoveries rising as depletion occurs.
The second new loop (shown partially in blue) is also a reinforcing loop. In a way similar to
the previous loop, this loop works through gas price and return on investment in exploration
to keep gas discoveries rising as depletion occurs.
The third new loop is a balancing loop. It is shown partially in Figure 14 with purple
information links. This loop works to keep the reserve-production ratio at its desired level by
changing gas price and hence new gas discoveries. In other words, this loop represents the
effects of gas price on the supply side of the gas system.
The fourth new loop shown partially in Figure 14 with teal information links is also
a balancing loop. This loop works to keep the reserve-production ratio at its desired level by
changing gas price and hence the gas usage rate. In other words, this loop represents the
effects of gas price on the demand side of the gas system.

132

Figure 16 shows time series plots from a simulation of the model presented. A comparison
with Figure 13 reveals that the models behavior is essentially the same as before, although its
oscillations are less severe. This damping of the systems oscillations, of course, is due to the
feedback loops that were added to the system. Movements in the price (market) system take
away some of the pressure on the system to change via the percent of revenues invested in
gas exploration and discovery.

Figure 16: Time Series Plots from a Simulation of the Fifth Cut of Naills Model of U.S. Natural Gas Discovery
and Production

Natural Gas Discovery and Production Model: Sixth Cut

Figure 17 illustrates the stock-flow diagram for the sixth step in the recreation of Naills
model of U.S. natural gas discovery and production. To view equations that correspond to
model (Figure 18), click direct on the stock-flow diagram. The main additions to the system
are pieces of structure that enable a model user to easily change policies, such as gas price
regulation, during the simulation run.

133

(click on diagram to view equations)

Figure 17: Sixth Cut of Naill's Model of U.S. Natural Gas Discovery and Production.

Note: Click on rotating icon to access sixth cut of the

Natural Gas Discovery Model.

134

Price regulation is turned on in the model by changing a "switch" (SwitchForReg), shown in

blue, from a zero to a one. When the switch is flipped, gas price is determined from both
endogenous (TotalCost) and exogenous pressures (a price ceiling whose value is determined
outside of the model (presumably by the government)). If, on the other hand, SwitchForReg
remains set at zero, gas price is again determined endogenously via pressures from both
TotalCost and the EffRelResProdRatio.
Figure 19 shows time series plots from a simulation of the model with no price regulation.
This run is directly comparable to previous model runs. When examined relative to Figure 16,
it is clear that the models (unregulated) behavior has essentially not changed.
On the other hand, Figure 20 shows time series plots from a simulation of the model under
the assumption of price regulation during the years 1955-1980; the simulation is fairly similar
to the one presented in Figure 19, although there is a large "blip" upward in the discovery
rate, usage rate, and in proven reserves in 1980, when gas price deregulation occurs. Overall,
however, the basic behavior mode of growth, peaking and decline has not changed.

Figure 19: Time Series Plots from a Simulation of the Sixth Cut of Naills Model of U.S. Natural Gas Discovery
and Production: Unregulated Scenario

135

Figure 20: Time Series Plots from a Simulation of the Sixth Cut of Naills Model of U.S. Natural Gas Discovery
and Production: Regulated Scenario

Finally, in the Reference Modes section of this chapter, we presented some actual data from
the U.S. natural gas system including actual discovery rate, usage (production) rate, proven
reserves, and reserve-production ratio. Although these data do not span the entire life cycle
of the natural gas system (roughly the years 1900 to 2050) a la Hubbert, they were used to
complement the reference modes resulting from Hubbert's theory and to calibrate the model.
Figure 21 shows the time series plot comparing the actual data to simulated data between the
years 1975 to 1995.

136

Figure 21: Time series plot comparing the actual data to simulated data between the years 1975 to 1995.

Policy Explorations with Natural Gas Model

Now that you have been introduced to the underlying assumptions of the system dynamics
model for the natural gas industry, it is time to use the model to conduct your own policy
experiments. The figure below illustrates the basic layout of the flight simulator version of
the Natural Gas Discovery Model. To launch the "flight simulator" version of the Natural Gas
Discovery model, click on the rotating icon
. Then try some of the experiments suggested
below. Once you have gained some familiarity with using the model, you can begin to
develop your own experiments.

137

Figure 1:Layout of the Natural Gas Discovery Simulator

Establishing the base run

For these policy experiments, we first want to establish a base run. A base run is our first
estimate of how we think the system works today. By establishing this as a baseline, we then
can compare the results of each change in the model back to the base. Follow the steps listed
below:
1. Click on the run button at the top of the flight simulator.
2. Note that clicking on run button also forces the pause button down. This initial pause
is designed to allow the user to change variables and initial conditions particular to the
desired run. However, for the base run, the model is "preset" with the correct settings.
3. Click on the pause button to release it and begin the simulation. Your output graphs
should look like Figure 2 below:

138

Figure 2: Example time series plot of base run Proven Reserves and Discovery Rate variables.

After checking through the different graphs, you should be ready to start changing parameters
in the model to see how the simulation can unfold differently under different policies and
scenarios. The control panel contains two kinds of parameters for you to control: Policy
Levers and Uncertainties variables.
1. Policy Levers: These are variables that represent decisions people make based on the
information that they are receiving from the system. For example, the Wellhead Price
Tax is a government control lever.
2. Uncertainties: Things that influence the system from the outside that we cannot
predict. We want to test different policies against many scenarios of the uncertainties
to see what are the best policies. For example, the initial value for the Unproven
Reserves variable is only an estimate. Therefore, this simulator allows the user to vary
this initial value to the sensitivity of the model to this uncertainty.
We will walk you through one experiment in more detail to illustrate the steps of changing
the policy and explane the results, and then set you loose to experiment with the rest.
Guided Experiment

What if the unproven reserves of natural gas were 50% greater than we first estimated? This
is an experiment in which we are going to alter one of the "uncertainties" in the model to see
how much difference it will make in the behavior of the natural gas industry:
1. To start the run, press the run button as in the base run.
2. Scroll to the Unproven Reserves graph and look for the gage titled "INITIAL." This
gage will allow you to enter different assumptions about the initial amount of
unproven reserves. Click on the right arrow button under this gauge to increase the %
139

percent of baseline value. Since we want to increase the initial value of the unproven
reserves by 50% (2e15 ft^3), the gauge should be set to 150% of the baseline value as
shown in Figure 2.
3. Now press the pause button to resume the simulation. When the simulation is
complete, you can move over to the graphs to see what happened as a result.

Figure 3: Setting initial uproven reserves to 50% greater than base case

One of the sets of graphs are called comparative graphs and allow the same variable to be
shown on the same graph for multiple experiments, as shown in Figure 3 below:

Figure 4: Comparison of base run and results of increasing base unproven reserves by 50%.

The first run in the red line was the base run. The green line is the new run with the new
assumption about the amount of unproven runs. Look through the other graphs. What
happened? For how much longer did the significantly higher amount of unproven reserves
allow the industry to continue? Why do you think this happened? These are the kinds of
questions you should be asking yourself as you go through different experiments using the
slide bars in the control panel.
To clear the results of a particular simuation experiment, simply pull down the simulate
menu and select the "clear results" option as shown in Figure 5.

140

Figure 5: Clearing Experiment Results

Suggested Experiments:
Conservation policy 1- What would happen if the government (or industry) set up a policy
to encourage the conservation of natural gas whenever the proven reserves fall? We can
simulate this policy through the natural gas Demand variable in the control panel. This
variable can be changed at any time during the simulation.

Conservation policy 2 - Use a simple tax on the wellhead price to

discourage use of natural gas. Use the Wellhead Price Tax box to
tax.

Exploration Investment - What would happen if industry was

more
aggressive in their efforts to discover new sources of natural gas?
We can model this policy by changing the base fraction of revenues invested in exploration.

Uncertainties
Amount of unproven reserves - One of the fundamental uncertainties
of natural resources is that we don't know how much is underground that
we have not yet discovered. An important test of the natural gas system is to find out how
much difference it would make if there were twice as much as we first estimated. What would
happen
if
there
were
ten
times
(1000%
of
baseline)
as
much?
Base usage
uncertainty
the growth
variable
is

growth rate - Another important

in the future of the natural gas industry is
rate of the demand for energy. This
the percent increase in the base demand
141

for

natural

gas.

Technology Investment - The technology multiplier is a multiplier against the cost of

exploration. It represents advances in technology that make it cheaper to access the unproven
natural gas. Change this multiplier to a fraction of the base cost to see the impact of a
technology advance at any time during the simulation.

Now that you've read this book, and "surfed" through some examples, what is your next step? One
of the difficulties is that while the software used in system dynamics modeling has made it easy to
build models, it takes some discipline and practice to make good system dynamics models. A good
model is a model that focuses on examining a problem or behavior, rather than trying to model an
entire system. A good model is one that is a documented, understandable, and concise representation
of a system. And most importantly, a good model is one that can help people better understand the
world in which they are trying to act and enable them to make more effective long-term decisions.
Cautious Enthusiasm: The goal of this book is to share the philosophy and tools of system
dynamics. Your ultimate success relies, of course, on actually practicing yourself. Each of the
systems dynamics software packages comes with excellent manuals to get you started. We would
also recommend working with someone more experienced at some point to help you accelerate the
learning process.
Opportunities include:

courses at some universities,

workshops through either the software manufacturers or consultants, or

modeling projects with more experienced practitioners, either in your own organization or
outside consultants.

System Dynamics Resources

System Dynamics Internet Related Sites

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MIT

System

Dynamics

Group

The System Dynamics Group was founded in the early

1960s by Professor Jay W. Forrester at MIT. Professor John
D. Sterman is the current director of the System Dynamics
Group. The Group has three main areas of research.The
National Model Project strives for a better understanding of
how the U.S. economy works. The System Dynamics in
Education Project was established in 1990 to write a "do it
yourself" workbook for learning system dynamics. With
funding from an NSF grant, the Group also studies the
Improvement Paradox: Designing Sustainable Quality
Improvement Programs.

System Dynamics Society - The System Dynamics Society

is an international, nonprofit organization devoted to
encouraging the development and use of system dynamics
around the world. It is run solely on a volunteer basis by
practitioners of System Dynamics in academics and
industry. With members in over 35 countries, the System
Dynamics Society provides a forum in which researchers
can keep up to date with applications, methodologies and
tools.The System Dynamics Society is responsible for the
publication of The System Dynamics Review, a refereed
journal containing articles on methodology and application.
A President's letter provides an informal forum to bring
members up to date on society
activities and business.

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System
Dynamics
in
Education
Project
The System Dynamics in Education Project (SDEP) is a
group of students and staff in the Sloan School of
Management at the Massachusetts Institute of Technology,
working under the guidance of Professor Jay W. Forrester,
the founder of system dynamics.

Society for Computer Simulation International

Society for Computer Simulation is an international, multidisciplinary
forum dedicated to research, development and applications of
simulation. Established in 1952, the Society for Computer Simulation is
a non-profit, volunteer-driven corporation (Simulation Councils Inc.).
SCS is the only technical society dedicated to advancing the use of
computer simulation to solve real world problems. SCS membership
represents a world-wide network of working professionals whose work
requires them to be current with advancements in simulation technology.
Regional councils from the United States and Canada, the European
Economic Community, Pacific Rim and China and Mexico meet
frequently and allow members the opportunity to network informally,
while conferences offer a forum for formal presentations of research
breakthroughs.

The Santa Fe Institute

The Santa Fe Institute is a private, independent, multidisciplinary
research and education center, founded in 1984. Since its founding, SFI
has devoted itself to creating a new kind of scientific research
community, pursuing emerging science. Operating as a small, visiting
institution, SFI seeks to catalyze new collaborative, multidisciplinary
projects that break down the barriers between the traditional disciplines,
to spread its ideas and methodologies to other individuals and encourage
the practical applications of its results.

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Publications and Research Project Information for John Sterman,

Director, MIT System Dynamics Group and J. Spencer
Standish Professor of Management

o Written Material

Productivity Press - publisher of all system dynamics academic books P.O.Box 13390, Portland, OR 97213. Phone (503) 235-0660. Call to get a
catalog.

Pegasus Communications - publisher of The Systems Thinker newsletter, an

excellent source on causal loop diagrams and the conceptual modeling portion
of the field - P.O. Box 120, Kendall Square, Cambridge, MA 02142. Phone
(617) 576 1232

The System Dynamics Society - publishers of the journal The System

Dynamics Review - Phone: (617) 259-0969, sdsociety@aol.com

o System Dynamics Software

Powersim - is available from Powersim AS (Norway), P.O. Box 206, N-5100

Isdalst, Norway, 47-56-342-400 (Phone), 47-56-342-401 (Fax)

ithink/Stella -distributed by High Performance Systems, 45 Lyme Road,

Hanover, NH 03755. Phone (603) 643 9636

Vensim - distributed by Ventana Systems, Inc, 60 Jacob Gates Road, Harvard,

MA 01451. Phone (508) 456-3069

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