From IFWiki

An artificial environment intended to duplicate a real world counterpart without inflicting real world consequences.

A simulation should mimic every cause and effect--capturing the rules of the real world environment. Where first-hand experience is important (piloting a plane, playing the protagonist in a story), it should also convey the "feel" of being in the world by engaging the senses and evoking emotions.

Nearly all IF qualifies as simulation on some level. The term may be more narrowly applied to a specific task or function either within or separate from a normal work of IF, and imply a greater attention to detail. For example, there might be a mountain climbing simulation within a larger story or as its own stand-alone work. The mountain climbing here would (should) be more than a "u" command. -- JdBerry - 09 Sep 2002

See also simulationist.