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The Formula That Killed Wall Street
We recently discussed the perspective that the harrowing of Wall Street was caused by over-reliance on computer models that produced a single number to characterize risk. Wired has a piece profiling David X. Li, the quant behind the formula that enabled the creation of such simple risk models. "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. ... [T]he real danger was created not because any given trader adopted it but because every trader did. In financial markets, everybody doing the same thing is the classic recipe for a bubble and inevitable bust."
Enter Li, a star mathematician who grew up in rural China in the 1960s. He excelled in school and eventually got a master's degree in economics from Nankai University before leaving the country to get an MBA from Laval University in Quebec. That was followed by two more degrees: a master's in actuarial science and a PhD in statistics, both from Ontario's University of Waterloo.
He has more degrees than a thermometer!
Ponzi? http://en.wikipedia.org/wiki/File:Gaussian_copula.png
In Nazi Germany, global warming Godwins you?
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And it is a big but. You must know the limitations of your model.
Is that you, Sir Mix-A-Lot?
As if it weren't bad enough to be using skewed or insufficient inputs, we also had everybody doing the exact same thing -- seeking a talisman to exorcise danger and legitimize universal greed.
And then it came. Correlation's revenge!
Apparently you do need an MBA to think that growth can be infinite and profit generated indefinitely.
Yes. And he cannot lie, apparently.
There is nothing wrong with using a model.
I'll say, especially if you're a single guy just looking for a good time.
God invented whiskey so the Irish would not rule the world.
I can't deny that either.
Obama is trying to out do Bush in just 100 days.
I didn't used to think so, but yeah, you're right. You convinced me.
Tsunami -- You can't bring a good wave down!