An economic bubble is a period when current asset prices greatly exceed their intrinsic valuation, being the valuation that the underlying long-term fundamentals justify. Bubbles can be caused by overly optimistic projections about the scale and sustainability of growth, and/or by the belief that intrinsic valuation is no longer relevant when making an investment. They have appeared in most asset classes, including equities, commodities, real estate, and even esoteric assets. Bubbles usually form as a result of either excess liquidity in markets, and/or changed investor psychology. Large multi-asset bubbles, are attributed to central banking liquidity.
System dynamics (SD) is an approach to understanding the nonlinear behaviour of complex systems over time using stocks, flows, internal feedback loops, table functions and time delays.
The twelve leverage points to intervene in a system were proposed by Donella Meadows, a scientist and system analyst who studied environmental limits to economic growth.
Negative feedback occurs when some function of the output of a system, process, or mechanism is fed back in a manner that tends to reduce the fluctuations in the output, whether caused by changes in the input or by other disturbances. A classic example of negative feedback is a heating system thermostat — when the temperature gets high enough, the heater is turned OFF. When the temperature gets too cold, the heat is turned back ON. In each case the "feedback" generated by the thermostat "negates" the trend.
Positive feedback is a process that occurs in a feedback loop which exacerbates the effects of a small disturbance. That is, the effects of a perturbation on a system include an increase in the magnitude of the perturbation. That is, A produces more of B which in turn produces more of A. In contrast, a system in which the results of a change act to reduce or counteract it has negative feedback. Both concepts play an important role in science and engineering, including biology, chemistry, and cybernetics.
Performance tuning is the improvement of system performance. Typically in computer systems, the motivation for such activity is called a performance problem, which can be either real or anticipated. Most systems will respond to increased load with some degree of decreasing performance. A system's ability to accept higher load is called scalability, and modifying a system to handle a higher load is synonymous to performance tuning.
Within the budgetary process, deficit spending is the amount by which spending exceeds revenue over a particular period of time, also called simply deficit, or budget deficit: the opposite of budget surplus. The term may be applied to the budget of a government, private company, or individual. Government deficit spending was first identified as a necessary economic tool by John Maynard Keynes in the wake of the Great Depression. It is a central point of controversy in economics, as discussed below.
The accelerator effect in economics is a positive effect on private fixed investment of the growth of the market economy. Rising GDP implies that businesses in general see rising profits, increased sales and cash flow, and greater use of existing capacity. This usually implies that profit expectations and business confidence rise, encouraging businesses to build more factories and other buildings and to install more machinery. This may lead to further growth of the economy through the stimulation of consumer incomes and purchases, i.e., via the multiplier effect.
In corporate finance, capital structure refers to the mix of various forms of external funds, known as capital, used to finance a business. It consists of shareholders' equity, debt, and preferred stock, and is detailed in the company's balance sheet. The larger the debt component is in relation to the other sources of capital, the greater financial leverage the firm is said to have. Too much debt can increase the risk of the company and reduce its financial flexibility, which at some point creates concern among investors and results in a greater cost of capital. Company management is responsible for establishing a capital structure for the corporation that makes optimal use of financial leverage and holds the cost of capital as low as possible.
In finance, leverage, also known as gearing, is any technique involving borrowing funds to buy an investment.
A causal loop diagram (CLD) is a causal diagram that aids in visualizing how different variables in a system are causally interrelated. The diagram consists of a set of words and arrows. Causal loop diagrams are accompanied by a narrative which describes the causally closed situation the CLD describes. Closed loops, or causal feedback loops, in the diagram are very important features of CLDs.
Leverage-point modeling (LPM) is a demonstrated approach for improved planning and spending for operations and support (O&S) activities. LPM is a continuous-event simulation technique that uses the system dynamics approach of model building. Dr. Nathaniel Mass championed the potential of LPM, and adapted it for the Department of Defense (DoD) as a tool for jumping to a higher performance curve as a means of offsetting higher costs and declining budgets. The purpose of LPM is to test policies and investments that improve mission capability for a given level of investment or funding. It is particularly used to evaluate investments in component reliability and parts availability.
A credit crunch is a sudden reduction in the general availability of loans or a sudden tightening of the conditions required to obtain a loan from banks. A credit crunch generally involves a reduction in the availability of credit independent of a rise in official interest rates. In such situations, the relationship between credit availability and interest rates, changes. Credit becomes less available at any given official interest rate, or there ceases to be a clear relationship between interest rates and credit availability. Many times, a credit crunch is accompanied by a flight to quality by lenders and investors, as they seek less risky investments.
A system archetype is a pattern of behavior of a system. Systems expressed by circles of causality have therefore similar structure. Identifying a system archetype and finding the leverage enables efficient changes in a system. The basic system archetypes and possible solutions of the problems are mentioned in the section Examples of system archetypes. A fundamental property of nature is that no cause can affect the past. System archetypes do not imply that current causes affect past effects.
Fixes that fail is a system archetype that in system dynamics is used to describe and analyze a situation, where a fix effective in the short-term creates side effects for the long-term behaviour of the system and may result in the need of even more fixes. This archetype may be also known as fixes that backfire or corrective actions that fail. It resembles the Shifting the burden archetype.
Attractiveness Principle is one of System Dynamics archetypes. System archetypes describe common patterns of behavior in dynamic complex systems. Attractiveness principle is a variation of Limits to Growth archetype, with restrictions caused by multiple limits. The limiting factors here are each of different character and usually cannot be dealt with the same way and/or they cannot be all addressed.
Accidental Adversaries is one of the ten system archetypes used in system dynamics modelling, or systems thinking. This archetype describes the degenerative pattern that develops when two subjects cooperating for a common goal, accidentally take actions that undermine each other's success. It is similar to the escalation system archetype in terms of pattern behaviour that develops over time.
The environmental sustainability problem has proven difficult to solve. The modern environmental movement has attempted to solve the problem in a large variety of ways. But little progress has been made, as shown by severe ecological footprint overshoot and lack of sufficient progress on the climate change problem. Something within the human system is preventing change to a sustainable mode of behavior. That system trait is systemic change resistance. Change resistance is also known as organizational resistance, barriers to change, or policy resistance.
A balance sheet recession is a type of economic recession that occurs when high levels of private sector debt cause individuals or companies to collectively focus on saving by paying down debt rather than spending or investing, causing economic growth to slow or decline. The term is attributed to economist Richard Koo and is related to the debt deflation concept described by economist Irving Fisher. Recent examples include Japan's recession that began in 1990 and the U.S. recession of 2007-2009.
The escalation archetype is one of possible types of system behaviour that are known as system archetypes.
