By studying population growth among rabbits, Leonardo of Pisa, better known as Fibonacci, created the Fibonacci numbers, a series of figures where each number is the sum of the two preceding numbers: 1, 2, 3, 5, 8, 13, 21, and so on.
His 1202 tome, Liber Abaci, which explained the series, also was a textbook for doing commerce at a time of unprecedented trade between East and West. There were a host of mathematical tools presented in the book, including how to compound interest and how to divvy up profits from joint ventures.
But the book also probably represented the first time in history that anybody had explained how to calculate present value of different contracts, a key concept in financial analysis, writes Yale University finance professor Will Goetzmann in a draft paper.
Fibonacci takes the example of a soldier granted an annuity by the king of 300 bezants per year, paid in equal quarterly installments. The king then decides to pay the entire 300 bezants in an annual year-end payment. Fibonacci calculated how the soldier's effective compensation had altered, given his loss of investment income during the course of each year, Mr. Goetzmann explains.
Fibonacci's pioneering work, Mr. Goetzmann writes, helped develop financial contracts, instruments and markets in Europe — an edge that helped Europe surpass China hundreds of years later.
