IN PURSUIT OF THE PERFECT PORTFOLIO
A Brief History of Investments
By Andrew Lo and Stephen Foerster
Investing in its earliest form can be linked to the risk / reward decisions of long-distance trading . During the late Pre-Pottery Neolithic period in the prehistoric Middle East , between 9500 and 8500 bce , settled village life emerged . Settlers from the Jordan Valley engaged in the long-distance trade of obsidian , domesticated wheat and sheep with the people of the Central Anatolian Plateau and the Zagros-Taurus arc . These treks presented traders with substantial dangers , as their quest for profits required making daily risk / reward decisions . Thanks to their savvy investment decisions , long-distance trade flourished like never before ,
Illustration of ships belonging to the British East India Company , one of the first “ modern ” joint-stock companies , founded in 1600 . Inset : Bust of the Greek orator Demosthenes , who performed an early net present valuation calculation in a court case regarding his father ’ s estate in the fourth century BCE . spanning a distance of fifteen hundred miles and involving a striking variety of raw materials .
A Sumerian record from around 2400 bce may be a record of the oldest known personal loan : Ur-garima lent Puzur-Eshrat 40 grams of silver and 900 liters of barley . Around that time the first known surety bond was issued in Nippur in Mesopotamia , with a second party guaranteeing repayment of grain if the first party failed to reimburse the lender . The terms were written in cuneiform characters on a stone tablet that included the names of four witnesses , and , typically for its time , was executed in triplicate .
A type of derivative contract dates back to 1900 bce . Derivatives are named because their prices are derived from some underlying security , such as the price of a commodity . The first known derivatives contracts — what today would be called futures contracts — were written in Mesopotamia , in cuneiform script on clay tablets , and involved the future delivery of goods , often combined with loans . One such contract was between a merchant , Magrattum Akshak-shemi , and his client , Damqanum , agreeing to the future exchange of 30 planks of wood of specified lengths .
Subsequent to the early derivatives in Mesopotamia , another type of derivatives contract , the call option , was used around 600 bce in ancient Greece . Call options allow the buyer the option to buy a particular asset at an agreed-upon price at a future date . One of the first recorded accounts of such a transaction is related to the underlying price of olive oil presses . At the time , olive oil was used for making soap and for cooking and was also used as fuel for lamps and as a skin softener . After several years of poor harvests , the Greek philosopher and mathematician Thales of Miletus , known as one of the Seven Sages of Greece , used astronomy to predict an upcoming bumper olive crop . During the winter , he negotiated call options to buy the presses in the spring at their depressed
28 FINANCIAL HISTORY | Spring 2022 | www . MoAF . org