By Nick Massey
CNHI News Service
When I was a young stockbroker and commodities trader in the late 1970s, I became aware of a mathematical formula called Fibonacci ratios. What a great Italian name! It just rolls off the tongue like it should be a great Italian dish or a fine wine instead of mathematics.
Actually, it is a theory or formula developed by Leonardo Fibonacci in the 12th century, and he unleashed a body of knowledge that would change the world and how people looked at it.
Leonardo was a world-class geek by the standards of his day, with a passion for mathematics. He also learned to read books in Arabic and translated them back into Latin.
In a recent piece written by my friend and hedge fund trader John Thomas, I learned some interesting things about Fibonacci. He particularly liked ancient math books and there he learned that the Arabs had developed a numbering system vastly superior to the Roman numerals then in use in Europe. More importantly, they mastered the concept of zero and the placement of digits in addition and subtraction.
Now, just think about how significant this was to the world of math. Try multiplying CCVII by XXXIV. (The answer is VMMXXXVIII, or 7,038). Try designing a house, a bridge, a computer software program, or just balancing your check book with such a cumbersome numbering system. Imagine our national debt of $16 trillion in Roman numerals.
Fibonacci discovered a series of numbers that seemed to have magical predictive powers. The formula is extremely simple. Start with zero, add the next number, and you have the next number in the series. Continue the progression and you get 0,1,1,2,3,5,8,13,21,34,55.... and so on. Not surprisingly, the sequence became known as the “Fibonacci Sequence” or “Fibonacci Ratios.”
The great thing about this series is that if you divide any number in it by the next one, you get a product that has become known as the “Golden Ratio.” This number is 1:1.618, or 0.618 to one. Fibonacci’s original application for this number was that it could be used to predict the growth rate of a population of breeding rabbits. I guess that was a valuable skill back then.