The LI's are calculated by using this exact principle. Theoretical because it often does not rise like this, but in a nearly identical pattern. The 500mb level is a very significant level in meteorology, this level often has significant effects on the weather at the surface. Because of this, it is also used in the LI's. The lifted index is simply calculated, by how much warmer the theoretical parcel of air would be, then the 500mb level.
Lets look at an example.
This indicates that the atmosphere is unstable, and thus convective development would be likely. This is how the most common lifted index is calculated. It's a fairly simple calculation, not very complex at all, and the LI is an extremely useful variable. However, unfortunately, it experiences many complications and exceptions. Believe it or not, sometimes you can have LI's of less than 10C, and no convective development will occur.