Gaussian Copula Function = Trojan Horse?

Former University of Waterloo statistician David X. Li didn't burn down the American economy. He just supplied the matches.

As economists and market watchers cast about for people to blame for the U.S. market meltdown, Li has surfaced as a scapegoat. Recently, Wired magazine ran an article on Li's work subtitled, "The Formula That Killed Wall Street."

The formula in question is the so-called Gaussian copula function. On the most basic level, the formula allows statisticians to model the behaviour of several correlated risks at once.

In a scholarly paper published in 2000, Li proposed the theorem be applied to credit risks, encompassing everything from bonds to mortgages. This particular copula was not new, but the financial application Li proposed for it was.

Disastrously, it was just simple enough for untrained financial analysts to use, but too complex for them to properly understand. It appeared to allow them to definitively determine risk, effectively eliminating it. The result was an orgy of misspending that sent the U.S. banking system over a cliff. More here.