That mathematics is dangerous stuff. According to the article, a single formula — the Gaussian copula — killed Wall Street. But according to this article, it’s all the fault of physicists. The only explanation I can come up with that makes sense of these two conflicting versions of events? Mathematics is dangerous only when it falls into the wrong hands.
Ars Mathematica
Dedicated to the mathematical arts.
Science is only a tool. It’s
applications are often misused for nefarious purposes ( ie power, control and greed in this case) . David Li is not to blame nor is any other scientist for that matter who worked on mathematical modelling applications for finance. If anything they, “the quants”, were probably naive or foolhardy in trying to apply sound scientific principles to the sometimes irrational pseudoscience that is economics. Economists can always explain why a financial event has occurred in as much as to why it hasn’t occured.
Li’s Gausssian Copula formula is only a model and a tool that described reasonable risk and uncertainties in a linear environment. It’s the bankers who embraced the equation as the technical Holy Grail in eliminating uncertainties and thereby reducing the risks. The variables of irrational and illogical human behavior cannot be integrated into any equation.
The evolution of complex financial products that Wall Street dreamed up, was something that Li’s Model should never have been utilized. There is no historical data to relie on, nor is there an experiment that could be reproduced to yield useful data. Models are tools to help describe real events, but in extremely complex dynamic environments their limitations are all too apparent. The Banks and rating agencies did not see or understand the implications of using the same model to describe the most ludicrous of financial scenarios.
The methods of science and finance can still yield constructive tools , although it should be one of cautious pursuit.