Monday, January 30, 2012

Disastrous Innovation: Gaussian Copula Function.

A recipe for success eventually becomes a recipe for disaster.  The transition happens faster when people ignore limitations inherent in the technology and/or don't pay attention to the changing environment.

Feb 23, 2009. Wired -- 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. became so deeply entrenched—and was making people so much money—that warnings about its limitations were largely ignored.

Then the model fell apart. Cracks started appearing early on, when financial markets began behaving in ways that users of Li's formula hadn't expected. The cracks became full-fledged canyons in 2008—when ruptures in the financial system's foundation swallowed up trillions of dollars and put the survival of the global banking system in serious peril.


tags: technology, science, invention, problem

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