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Business Dynamics and System
ModelingChapter 3: Modeling
Process
Pard Teekasap
Southern New HampshireUniversity
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Outline
1.Purpose of modeling
2.The client and the modeler
3.Steps of the modeling process4.Modeling is iterative
5.Overview of the modeling process
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Purpose of modeling
Who are the most important peoplein the safe operation of an aircraft?
Designer OR Pilot
Too many managers spend far toomuch time acting as pilots ratherthan creating an organizational
structure consistent with theirvision and values
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Small or Big Problem
Solutions to small problems yieldsmall rewards
Focus your model on the importantissues, on the problems where yourwork can have lasting benefit, onthe problems you care most deeply
about
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Client and Modeler
Clients = people you must influencefor your work to have impact
Purpose is to help the clients solvetheir problem. If the clientsperceive your model does notaddress their concerns or lose
confidence in it, youll have littleimpact
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Clients are not always right
Modelers have a responsibility torequire their clients to justify theiropinions, ground their views in
data, and consider new viewpoints
When the clients ask for somethingyou think is unnecessary or
misguided, you must work withthem to resolve the issue
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Steps of the modelingprocess
1. Problem Articulation(Boundary Selection)
3. Formulation4. Testing
5. PolicyFormulation& Evaluation
2. DynamicHypothesis
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Iterative with real world
MentalModelsof Real
World
Strategy,Structure,Decision
Rules
RealWorld
Information
Feedback
Decisions(Organizational
Experiments) 1. Problem Articulation(Boundary Selection)
3. Formulation4. Testing
5. PolicyFormulation& Evaluation
2. DynamicHypothesis
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Problem articulation
What is the issue the clients are mostconcerned with?
What problem are they trying toaddress?
What is the real problem, not just thesymptom of difficulty?
What is the purpose of the model?
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Can I model the wholeworld?
Is it useful to have the map asdetailed as the territory?
To be useful, model must address a
specific problem and simplify Usefulness of models lies in the fact
that they simplify reality, creating a
representation of it we cancomprehend
The model should be simple enoughso the assumptions could be
examined
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Methods for articulate theproblem
References Modes
Time Horizon
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Reference Modes
Set of graphs and other descriptivedata showing the development ofthe problem over time
You and the clients must identify thetime horizon and define variablesand concepts you consider to be
important for understanding theproblem and designing policies tosolve it
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Time Horizon
How long should I collect the data?
It should far enough back in historyto show how the problem emergedand describe its symptom
How far should I simulate to?
It should far enough into the future tocapture the delayed and indirecteffects of potential policies
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US Energy market is stable
0
6
12
18
1986 1988 1990 1992 1994 1996
MillionBarrels/Day
Alaska
Production,Lower 48 States
Consumption
Imports
0
5
10
15
20
25
30
1986 1988 1990 1992 1994 1996
1990$/bbl
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Are you sure it is stable?
0
6
12
18
1870 1890 1910 1930 1950 1970 1990
MillionBarrels/Day
Alaska
Production,
Lower 48 States
Consumption
Imports
0
10
20
30
40
50
1870 1890 1910 1930 1950 1970 1990
1990$/bbl
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Or it is stable?
-10000 -5000 0 5000
F
ossilEnergyP
roduction
Year
IronAge First Oil
ShockIndustrial
Revolution
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So how long should Isimulate
A good rule of thumb is to set thetime horizon several times as longas the longest time delays in the
system, and then some
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Formulating a dynamichypothesis
Develop a theory to account for theproblematic behavior
Dynamic because it must provide an
explanation of the dynamicscharacterizing the problem in term ofunderlying feedback and stock andflow structure of the system
Hypothesis because its provisional,subject to revision or abandonment
Goal is to help the client develop anendogenous explanation for theproblematic dynamics
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Endogenous Explanation
An endogenous theory = thedynamics of a system through theinteraction of the variables and
agents represented in the model A exogenous variables theory
explains the dynamics of variables
in term of other variables whosebehavior youve assumed
From the beer game, who generates
the system behavior
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Exogenous is still important
Focusing on endogenousexplanations does not mean neverinclude any exogenous variables in
the model. But the number ofexogenous inputs should be smalland carefully scrutinized
If there are any important feedbacksfrom endogenous elements to thatexogenous input, the model shouldexpand and that input must be
modeled endogenously
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Tools for mapping systemstructure
Model boundary chart
Subsystem diagram
Causal Loop Diagram (CLD) Stock and flow maps
Policy structure diagrams
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Model boundary chart
Endogenous Exogenous Excluded
GNP Population Inventories
Consumption Technological change International trade
Investment Tax rates Environmental
constraintsSavings Energy Policies Non-energy resourcesPrices Interfuel substitution
Wages Distributional equity
Inflation rate
Labor forceparticipationEmployment
Interest rate
Energy production
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Benefits of model boundarychart
Alert the clients to a questionableassumption so they could evaluatewhat the effect of the missing
feedback might be Without a clear understanding of the
boundary and assumptions, models
constructed for one purpose arefrequently used for another forwhich they are ill-suited,
sometimes producing absurd
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Subsystem diagram
Convey information on the boundaryand level of aggregation in themodel by showing the number and
type of different organizations oragents represented
Should not contain too much detail
Multiple subsystem diagrams can beused to convey the hierarchicalstructure of large models
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Subsystem diagram forcorporate growth model
Company Market
Mkt. Response to Quality
Mkt. Response to Suitability
Mkt. Response to Delivery Delay
Mkt. Response to PriceOrders
Payment
Delivery of ProductPrice
Quality
Delivery Delay
Product SuitabilitySales Effort
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CLD, Stock & Flow, Policystructure diagram
CLDs are useful for diagramming thefeedback structure of systems
Stock and flow diagrams emphasize
their underlying physical structureand track accumulations of material,money, and information as they movethrough a system
Policy structure diagrams focus on theinformation cues the modelerassumes decision makers use togovern the rate of flow in the system
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Formulating a simulationmodel
Transfer from conceptual model toformal model
Formalization helps to you to
recognize vague concepts andresolve contradictions that wentunnoticed or undiscussed during
the conceptual phase
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Testing
Not only to replicate historicalbehavior, every variable mustcorrespond to a meaningful
concept in the real world Every equation must be checked for
dimensional consistency
Sensitivity of model behavior andpolicy recommendations must beassess in light of uncertainty inassumptions
Test for extreme conditions
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Policy design and evaluation
Policy design is more than justchanging the value of parameters.It includes the creation of entire
new strategies, structures, anddecision rules
The robustness of policies and theirsensitivity to uncertainties in model
parameters and structures must beassessed, including theirperformance under a wide range ofalternative scenarios
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