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."

Comments

fuck computers

[doyoulikegoatseeee]

computers suck

Fir57 post

[Anonymous Coward]

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Re:Nothing wrong with models.

[Dishevel]

In both Nazi Germany and The US. Its the people who were and are at fault. Its my fault GW spent our country into oblivion and wiped his bottom with the constitution using the patriot act. And it is my fault that Obama is going to finish off the country with more spending and a socialist agenda.