1. System Dynamics – 1ZM65/1ZS24 Lecture 2 September 8, 2014 Dr.ir. Bob Walrave

2. Agenda PAGE 119-5-2015 Recap of Lecture 1 Structure and behavior of dynamic systems (chapter 4 ) Causal loop diagramming (chapter 5)

3. Recap of Lecture 1 PAGE 219-5-2015 Dilbert contemplating policy resistance. “The behavior of a system arises from its structure!”

4. PAGE 319-5-2015 Recap of this lecture (take-aways) System Dynamics is: About understanding why and how things usually work out differently than you expected (policy resistance) About counterintuitive behavior of systems Looking at the world differently: Feedback view Seeing the bigger picture (bird’s-eye view) A methodology to analyze problems Learning System Dynamics requires a lot of practice! 5 ECTS = 140 hours 18 weeks until due date  7.8 hrs/wk

5. Reference: Business Dynamics PAGE 4 19-5-2015

6. Recap of Lecture 1 Characteristics of dynamic complex systems: The modeling process: PAGE 519-5-2015 your decisions your goals situation unintended side effects goals of others decisions by others 1. Problem Articulation (Boundary Selection) 2. Dynamic Hypothesis 3. Formulation4. Testing 5. Policy Formulation & Evaluation Policy resistance

7. Example of Test Question (Lecture 1) This figure describes the learning cycle. However, there are many barriers to learning that cause this cycle to fail. Which of the following examples is NOT a way to break this cycle? (which is NOT a barrier to learning) A) Time delay B) Dynamic complexity C) Misperception of feedback D) Policy formulation PAGE 619-5-2015

8. PAGE 719-5-2015 Agenda Recap of Lecture 1 Structure and behavior of dynamic systems Causal loop diagramming Sterman, Chapter 4

9. Interactions of Structure and Behavior The behavior of a system arises from its structure. Behavior = output of a simulation model Structure = input of a simulation model, consisting of Feedback loops (causal loop diagram) Stocks and flows Time delays Nonlinearities PAGE 819-5-2015

10. Interactions of structure and behavior Structure Behavior over time PAGE 919-5-2015 time chickens = ??? time chickens time chickens + Reinforcing Loop Balancing Loop

11. Fundamental modes of behavior of dynamic systems Basis modes of dynamic behavior Exponential growth Goal seeking Oscillation Interactions of basic modes S-shaped growth Growth & overshoot Overshoot & collapse Other forms of behavior Equilibrium Random Chaos PAGE 1019-5-2015

12. Exponential growth PAGE 1119-5-2015 BehaviorStructure money on bank account interest per year Besides growth, we can also have exponential decline!

13. Goal-seeking PAGE 1219-5-2015 BehaviorStructure desired number of customers of a product attract more customers by advertising in supermarket actual number of customers This system is characterized by exponential decay (i.e., a half-life).

14. Oscillation PAGE 1319-5-2015 BehaviorStructure desired temperature in the room is 20ºC actual temperature in the room is 15 ºC increase heater

15. S-shaped growth PAGE 1419-5-2015 BehaviorStructure actual number of people in a bar people allowed in the bar is there still room in the bar? The interaction between positive and negative loops is non-linear.

16. Growth & Overshoot PAGE 1519-5-2015 BehaviorStructure number of rabbits in a meadow Food available

17. Overshoot & Collapse PAGE 1619-5-2015 BehaviorStructure actual number of people infected with a certain type of flu number of people that may be infected The more infected people, the less people may be infected in the future Model these fundamental modes of behavior in VENSIM PLE

18. Vensim illustration PAGE 1719-5-2015 State of the system  Stock Net increase rate  Flow

19. Systems archetypes Use these fundamental modes – by combining them – when you are modeling! Besides these fundamental modes there are generic templates that can be used to … Interpret a Causal Loop Diagram’s overall nature Refine a preliminary CLD See the leverage in the CLD’s structure PAGE 1819-5-2015

20. Four well-known archetypes are: 1.Fixes that fail 2.Shifting the burden 3.Limits to growth 4.Tragedy of the commons PAGE 1919-5-2015 For more information on archetypes, see: Wolstenholme, E.F., 2003, Towards the definition and use of a core set of archetypal structures in system dynamics, System Dynamics Review, 19(1): 7-26

21. “Fixes that fail” PAGE 2019-5-2015 Problem symptom Fix Unintended Consequence + + - + delay Recruitment of police to reduce reported crime Increase of crime Shortage of prison cells, leading to shortening prison sentences

22. “Shifting the burden” PAGE 2119-5-2015 Expediting orders for important customers Lead time is too long in a production plant Lead time of all other orders becomes even longer.

23. “Limits to growth” PAGE 2219-5-2015 Increase of sales effort leads to increase of orders Production capacity cannot keep up with increased demand, leading to longer production delays Customers are unsatisfied with long delays, leading to decrease of future orders

24. “Tragedy of the Commons” PAGE 2319-5-2015 Increase number of visitors to a national park, which increases profit, but also increases the damage to the park (disturb wildlife) Hoarding or bank-run

25. PAGE 2419-5-2015 Agenda Recap of Lecture 1 Structure and behavior of dynamic systems Causal loop diagramming Sterman, Chapter 5 5.1-5.4

26. Causal Loop Diagrams (CLDs) Capture hypotheses about the causes of dynamics Elicit and capture mental models Communicate the important feedbacks that are responsible for a problem See a CLD as a illustration of a story; a narrative that explain how a certain problem came to be The loops within a CLD a characterized by ‘loop dominance’, which facilitate your story PAGE 2519-5-2015

27. Elements of a Causal Loop Diagram Basic elements: Variables Arrows (causal link) Link polarity (+ or -) Loop identifiers Additional elements: Loop Polarity: −Balancing −Reinforcing System Delays PAGE 2619-5-2015 actual work pressure perceived work pressure quality of work hiring new employees total number of productive employees delay coaching effort by experienced employees + - - + - + +

28. Link polarity: definitions and examples Positive link: The higher the actual work pressure, the higher the perceived work pressure will be, after a certain (time) delay or: lower actual work pressure leads to lower perceived work pressure Negative link: The higher the perceived work pressure, the lower the quality of work (more errors are made) or: lower perceived work pressure leads to higher quality of work PAGE 2719-5-2015 perceived work pressure actual work pressure + perceived work pressure quality of work -

29. CLD Represent causation, not correlation PAGE 2819-5-2015 Figure 5-2, Sterman: Causal diagrams must include only (what you believe to be) genuine causal relationships.

30. Label link and loop polarities PAGE 2919-5-2015 Figure 5-3, Sterman ??

31. “Challenge” p.143: assign polarity, add loops Consider the attractiveness of a product to customers as it depends on various attributes of the product. Assign link polarities. What feedback loops might be created as product attractiveness changes the demand for the firm’s product? PAGE 3019-5-2015 Figure 5-4, Sterman: The attractiveness of a product as it depends on various attributes. Product Attractiveness Quality Price Delivery Delay Functionality + + - - Demand + +

32. Challenge p.145: Identify and label the polarity of links and loops PAGE 3119-5-2015 Profits Number of Competitors Attractiveness of Market Price Bank Cash Reserves Perceived Solvency of Bank Net Withdrawals + - + + + - -

33. Three ways to determine loop polarity The fast way: count the number of negative links A better way: trace the effect of change around a loop The formal way: do the mathematics PAGE 3219-5-2015 Profits Number of Competitors Attractiveness of Market Price + - + +

34. Assign unambiguous polarities PAGE 3319-5-2015 Figure 5-7, Sterman: Causal links must have unambiguous polarity ?

35. Name and number your loops PAGE 3419-5-2015 Figure 5-9, Sterman: Name and number your loops to increase diagram clarity and provide labels.

36. Indicate important delays in links PAGE 3519-5-2015 Figure 5-10 Representing delays in causal diagrams

37. Variable names should be nouns or noun phrases PAGE 3619-5-2015 Figure 5-12: Sterman ?

38. Variable names should have a clear sense of direction PAGE 3719-5-2015 Figure 5-13, Sterman ?

39. Choose variables whose normal sense of direction is positive PAGE 3819-5-2015 Figure 5-14, Sterman

40. Make intermediate links explicit PAGE 3919-5-2015 Figure 5-15, Sterman: Make intermediate links explicit to clarify a causal relationship.

41. Make goals of negative loops explicit PAGE 4019-5-2015 Figure 5-16, Sterman: Make the goals of negative loops explicit.

42. Distinguish between actual and perceived conditions PAGE 4119-5-2015 Figure 5-17, Sterman

43. Using Causal Diagrams to Model an Issue examples

44. Using Causal Diagrams to Model an Issue The majority of our problems can be captured by a combination of two loops: balancing & reinforcing The balancing loop describes what our goal is, what we try to accomplish The reinforcing loop describes what our main obstacle is or could be PAGE 4319-5-2015

45. PAGE 44 Structure & Behavior - First the balancing loop is driving the behavior, because the actual weight is always close to the desired weight - Around week 46 something happens, because the actual weight is not going back to its desired value - The reinforcing loop is now dominant DOMINANT LOOP: REINFORCING DOMINANT LOOP: BALANCING week desired weight actual weight deviation propensity to eat food intake - + - + + B mood propensity to snack (between meals) need for comfort food - - + + R

46. What do the loops tell us? Balancing loop: The loop is self- stabilizing The manager’s primary role is to monitor Act only when there is an exception or likelihood of one, i.e., gap between desired & actual weight Reinforcing loop: The loop is not self- stabilizing The manager’s primary role is to act If the cycle is vicious, find a way to break it 19-5-2015 PAGE 45

47. Guest Satisfaction Index in a hotel The GSI in the hotel is measured on a monthly basis When the GSI is above 8.2, the customers are happy, as well as the hotel staff However, the GSI recently dropped below 8.2, and now management is worried During a staff meeting, hotel management tells everyone that customer focus should be increased It is expected that after a while customer happiness returns and that the GSI will rise accordingly 19-5-2015 PAGE 46

48. Where to start? Start with a narrative, a story Underlying a specific problem What is the goal that you try to reach What happens when you deviate from the goal 19-5-2015 PAGE 47

49. Drawing the first loop Identify the goal seeking behavior in question Goal: desired GSI Starting point: indication of drift from goal GSI Shortfall (desired – actual GSI) Decision: focus on customer Effects: customer happiness, GSI Link variables & qualify links, insert delays Determine type of loop – balancing or reinforcing 19-5-2015 PAGE 48 GOAL: desired GSI actual GSI B GSI shortfall focus on customer happiness + - + + +

50. The problem is not as easy as it looks The increased focus on the customer leads to extra work for most of the team After a while, the extra work starts to exhaust the team As a result of this exhaustion, some team members start making mistakes Although the customer is still happy with the increased focus, the mistakes made by the staff have a negative effect on the GSI 19-5-2015 PAGE 49

51. Drawing the second loop Starting point: what could be another (side-) effect of increasing the focus on customers Other variables: More focus on customer can lead to extra work Doing more work can lead to exhaustion Exhaustion can lead to making mistakes, which reduces GSI Link variables & qualify links, include delays Determine type of loop – balancing or reinforcing 19-5-2015 PAGE 50 mistakes + R - actual GSI focus on customer happiness + B GOAL: desired GSI GSI shortfall + - + + + exhaustion + extra work

52. What can we learn from the loops? As long as GSI increases while the focus on customer increases, the BALANCING loop is in charge Apparently the hotel staff can handle the extra work When GSI decreases while the focus increases, you are in danger. The REINFORCING loop takes over Act now! 19-5-2015 PAGE 51 mistakes + R - actual GSI focus on customer happiness + B GOAL: desired GSI GSI shortfall + - + + + exhaustion + extra work

53. Using Causal Diagrams to Model an Issue But CLDs can become far more complex! PAGE 5219-5-2015

54. Causal loop diagramming (NRC 28 April 2010) 19-5-2015 PAGE 53 What is the problem with this figure?

55. Using Causal Diagrams to Model an Issue Problem definition: managing workload Identifying key variables: Assignment rate Work completion rate Assignment backlog Grades/Performance Workweek Energy level Developing the reference mode (next slide) Developing the causal diagrams PAGE 5419-5-2015

56. Reference mode - example - When a person manages his workload according to the “grasshopper strategy”, work will not be done until the deadline is very near. As a consequence the assignment backlog builds up And when the deadline is near, working overtime (or even at night) is no exception. PAGE 5519-5-2015 Figure 5-20, Sterman: Reference mode for the grasshopper strategy

57. Develop causal diagrams – managing workload PAGE 5619-5-2015 Figure 5-21: Sterman: Basic control loops for the assignment backlog

58. Adding the burnout-loop PAGE 5719-5-2015 Figure 5-22: Sterman: The burnout loop

59. Adding the “too tired to think”-loop PAGE 5819-5-2015 Figure 5-23: Sterman: The “too tired to think” loop

60. Adding “my dog ate my homework”-loop PAGE 5919-5-2015 Figure 5-24: Sterman: My dog ate my homework—Parkinson’s Law

61. From practice: what is the best team size? Linear view of the world: Small teams  low communication overhead  high efficiency But is this true? Lets examine the feedback view of the world PAGE 6019-5-2015

62. From practice: what is the best team size? PAGE 6119-5-2015 vulnerability to disturbances/deviations - + interruptions, complications, etc. + + increase focus + + fatigue + - knowledge sharing - dependency on tacit knowledge - + overtime + + priority change + Info/resources not available - + So, what is better: a large or a small team? team size communication overhead efficiency delays need to increase progress + - + + + - By the way: what is wrong with this CLD?

63. The beer game https://www.youtube.com/watch?v=qxpgM8paegQ https://www.youtube.com/watch?v=Aqi5-KzQZWc Play the game here: (http://www.beergame.lim.ethz.ch)(http://www.beergame.lim.ethz.ch PAGE 6219-5-2015

64. The beer game PAGE 6319-5-2015

65. Example of test question (Lecture 2) In the Netherlands, in the spring, when the sun is shining for the first time since months and the temperature is rising, many people want to go out and enjoy the lovely weather, instead of staying at the office. As a consequence, as soon as the temperature starts rising, many people take a day off (or a short holiday). Below, a causal structure of this phenomenon is given. What is the polarity of the links? A) Link 1 is positive, Link 2 is negative B) Link 1 is positive, Link 2 is positive C) Link 1 is negative, Link 2 is negative D) Link 1 is negative, Link 2 is positive PAGE 6419-5-2015

66. Example of test question (Lecture 2) PAGE 6519-5-2015 When people go on holiday, their colleagues have to take over some of their work. So, the workload for these colleagues is increasing. Most likely, these colleagues have to work overtime to get all the work done. Working overtime has a positive effect, because it increases productivity and reduces the remaining workload. But, it also has a negative effect, because it reduces motivation. The causal loops below describe this behavior. What is the polarity of the loops? A) Loop 1 is positive, Loop 2 is negative B) Loop 1 is positive, Loop 2 is positive C) Loop 1 is negative, Loop 2 is negative D) Loop 1 is negative, Loop 2 is positive

67. Questions? PAGE 6619-5-2015