Wall Street “Killer” Formula Exonerated?

David Li’s Gaussian copula formula has been called the formula that killed Wall Street, because of how it was used in pricing mortgage-backed securities.

Sociologists Donald McKenzie and Taylor Spears have a new paperon the history of the Gaussian copula model, based on detailed interviews with quants before and after the crisis. They find that the limitations of the Li model were well understood by financial modelers on Wall Street, and that none of them took the model as literally true. The formula became widely used for institutional reasons outside of the quant community — for example, once the industry had a standard model, then the model could be used in evaluating profit and loss. This is further evidence for the thesis that mathematics is only dangerous when it falls into the wrong hands.

Cathy O’Neal highlights the parts of the paper that address the questions of institutional politics and blame.

One thought on “Wall Street “Killer” Formula Exonerated?

  1. “Don’t blame the Farrari for the accident if your cracker ass don’t know how to drive.” -from the teleplay of the first season of HBO’s TRUE BLOOD

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