In physics, the word system has a technical meaning, namely, it is the portion of the physical universe chosen for analysis. Everything outside the system is known as the environment, which in analysis is ignored except for its effects on the system. The cut between system and the world is a free choice, generally made to simplify the analysis as much as possible. An isolated system is one which has negligible interaction with its environment.
Often a system in this sense is chosen to correspond to the more usual meaning of system, such as a particular machine. But physical systems are often more esoteric: an atom, the water in a lake, or indeed the water in the left-hand half of a lake can all be considered as physical systems. In the study of quantum decoherence the "system" may refer to the macroscopic properties of an object (e.g. the position of a pendulum bob), while the relevant "environment" may be the internal degrees of freedom, described classically by the pendulum's thermal vibrations.