Thursday, February 26, 2009

Li's Gaussian copula function - the recipe for disaster

I read this amazing article on Wired. A must read for anyone who wants to understand the financial crisis the whole world is entrenched in today.

http://www.wired.com/techbiz/it/magazine/17-03/wp_quant?currentPage=1

In financial markets, everybody doing the same thing is the classic recipe for a bubble and inevitable bust

In the world of finance, too many quants see only the numbers before them and forget about the concrete reality the figures are supposed to represent. They think they can model just a few years' worth of data and come up with probabilities for things that may happen only once every 10,000 years. Then people invest on the basis of those probabilities, without stopping to wonder whether the numbers make any sense at all.

I totally agree with the last part. If you cannot understand the concrete real world impact of some financial instrument.. it's not worth the risk of investing in it!

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1 Comments:

Anonymous Siddhi said...

Yeah nice article. I liked it so much that I even shared it on my facebook profile yesterday, something which I hardly do.

4:25 PM  

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