It's something out of pulp fiction, the super formula that wrecked a world! How insidious:
At the heart of it all was Li's formula... \The Gaussian copula soon became such a universally accepted part of the world's financial vocabulary that brokers started quoting prices for bond tranches based on their correlations. "Correlation trading has spread through the psyche of the financial markets like a highly infectious thought virus," wrote derivatives guru Janet Tavakoli in 2006.
The supervillain, or mathematician, is now in retreat:
Li has been notably absent from the current debate over the causes of the crash. In fact, he is no longer even in the US. Last year, he moved to Beijing to head up the risk-management department of China International Capital Corporation. In a recent conversation, he seemed reluctant to discuss his paper and said he couldn't talk without permission from the PR department. In response to a subsequent request, CICC's press office sent an email saying that Li was no longer doing the kind of work he did in his previous job and, therefore, would not be speaking to the media.
Probably fearing the first round of assassins, or at least torch-equipped neopeasants.
There's a lesson in futorology here. Partly it's the problem of drawing on too small a sample (and only in boom time!). Partly it's black swan time:
[P]people used the Gaussian copula model to convince themselves they didn't have any risk at all, when in fact they just didn't have any risk 99 percent of the time. The other 1 percent of the time they blew up. Those explosions may have been rare, but they could destroy all previous gains, and then some.
How many pulp fiction and Gothic elements can we spot? Mad science on the march... menacing super-genius from the East... insidious mind viruses...
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