I Blame the Mathematicians

[Lemur]

Interesting article about the math geeks who provided the idiots in Wall Street with their most important tool for screwing up: a formula.

For five years, Li's formula, known as a Gaussian copula function, looked like an unambiguously positive breakthrough, a piece of financial technology that allowed hugely complex risks to be modeled with more ease and accuracy than ever before. With his brilliant spark of mathematical legerdemain, Li made it possible for traders to sell vast quantities of new securities, expanding financial markets to unimaginable levels.

His method was adopted by everybody from bond investors and Wall Street banks to ratings agencies and regulators. And it became so deeply entrenched—and was making people so much money—that warnings about its limitations were largely ignored.

Then the model fell apart. Cracks started appearing early on, when financial markets began behaving in ways that users of Li's formula hadn't expected. The cracks became full-fledged canyons in 2008—when ruptures in the financial system's foundation swallowed up trillions of dollars and put the survival of the global banking system in serious peril.

David X. Li, it's safe to say, won't be getting that Nobel anytime soon. One result of the collapse has been the end of financial economics as something to be celebrated rather than feared. And Li's Gaussian copula formula will go down in history as instrumental in causing the unfathomable losses that brought the world financial system to its knees.

[Banquo's Ghost]

For five years, Li's formula, known as a Gaussian copula function,

Was that abbreviated, I wonder, to a "copula-tion"?

[Vladimir]

I thought it was Bush's fault.

[gaelic cowboy]

This is something I have been concerned about for a while now cos all our best and brightest are going into this swamp of high finance. Where once those maths geeks actually tried to use there degree now advancement comes from banks and hedge funds. Thankfully there all busted now and maybe our physicists and maths people will set about doing real work and scientific research which will give real breakthroughs in science and engineering. These guys were paid in effect to come up with a formulae that would justify investment and end with a nice bonus for themselves.