Here's what killed your 401(k) David X. Li's Gaussian copula function as first published in 2000. Investors exploited it as a quick—and fatally flawed—way to assess risk. A shorter version appears on this month's cover of Wired.
Probability
Specifically, this is a joint default probability—the likelihood that any two members of the pool (A and B) will both default. It's what investors are looking for, and the rest of the formula provides the answer. Survival times
The amount of time between now and when A and B can be expected to default. Li took the idea from a concept in actuarial science that charts what happens to someone's life expectancy when their spouse dies.
Equality
A dangerously precise concept, since it leaves no room for error. Clean equations help both quants and their managers forget that the real world contains a surprising amount of uncertainty, fuzziness, and precariousness.
Copula
This couples (hence the Latinate term copula) the individual probabilities associated with A and B to come up with a single number. Errors here massively increase the risk of the whole equation blowing up. Distribution functions
The probabilities of how long A and B are likely to survive. Since these are not certainties, they can be dangerous: Small miscalculations may leave you facing much more risk than the formula indicates.
Gamma
The all-powerful correlation parameter, which reduces correlation to a single constant—something that should be highly improbable, if not impossible. This is the magic number that made Li's copula function irresistible.
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"Correlation trading has spread through the psyche of the financial markets like a highly infectious thought virus,"
This is all sums up nicely, the killer magic! Yes flocking was, traders was like seasonal birds, all same herding direction. If you stray the herd your death probability high or you can built your own colony, but if you stuck into the group your probability survival is greater then stray so you struck into the safety zone and share the same faith, whichever whatever outcome. No questioned, but the eventual colony they are heading for, which years years they repeat, this year alone they have no guarantee for same as past years; full of foods, nice climax for their seasonal nesting etc… the bird colony might have volcanic eruption, or sea level rise wipe off all the nesting area or sink forever under water. They have to look for another alternate colony.
All ruins civilizations were result of natural disasters, often wipe out or abandonment by people because of the lack of natural resources(food), or natural disasters. Even if they were conquered by other culture because of unfavorable geographic reasons, the natural environmental they were in, if their nests were built in strong fertile land with nice climax and grantee certain seasonal rainfall, you could built stronghold. How advance our technology might be our survival still greatly depend on nature.
This financial melting is not same devastation as a civilization ruins so we still have a hope.
