Narrative and Numbers | Aswath Damodaran

Summary of: Narrative and Numbers: The Value of Stories in Business (Columbia Business School Publishing)
By: Aswath Damodaran


In the book ‘Narrative and Numbers: The Value of Stories in Business’, Aswath Damodaran explores the divide between number crunchers and storytellers in the business world. The author emphasizes the importance of bridging this divide for effective business valuation. Through real-life examples like Amazon and Ferrari, Damodaran demonstrates the power of integrating engaging narratives with compelling numbers for greater investor, customer, and employee understanding and trust. This summary covers key insights from the book, shedding light on the art of crafting effective business stories, substantiating them with numbers, and adapting them as market realities change.

The Power of Combining Stories and Numbers

The world is divided into two tribes: storytellers and people who focus on numbers. This division starts in childhood and continues into adulthood. However, investors and managers must learn to bridge the gap between the two groups in order to create accurate business valuations. A story without numbers lacks credibility, while numbers without a story can feel soulless. The best approach is to combine both, as demonstrated in the example of Ferrari. A numbers-oriented person might focus on revenue growth and operating margins, but this will only resonate with other math-adept individuals. A storyteller might focus on the history and prestige of Ferrari, but this doesn’t provide investors with enough information. Instead, the third approach uses numbers to support and lend credibility to the story. By doing so, investors can make informed decisions about the value of the company. It’s important to learn to communicate with both tribes in order to succeed in the business world and beyond.

The Power of Storytelling in Business

In business, numbers and storytelling go hand in hand, with each tribe benefitting from the other. While scammers use stories to take advantage of people’s emotions, responsible storytelling can help businesses connect with investors, customers, and employees. Even a great product needs a compelling narrative to support its success. The merger of storytelling and valuation helps storytellers recognize when their stories don’t add up, and numbers enthusiasts to acknowledge when their figures lack credibility. This approach is not specific to sports but is also evident in financial markets, where data overload can lead to emotional and illogical decision-making. People tend to trust numbers less and revert to pricing stories for their simplicity and directness, making it essential for businesses to use storytelling responsibly to connect with their audience. Finally, the author advocates for listening to those who disagree the most to make stories stronger and better. In any unexpected or challenging situation in the business world, this is an essential skill to possess.

The Rise and Fall of Theranos

In its prime, tech company Theranos enamored investors with its promise to revolutionize blood testing. Its young CEO, Elizabeth Holmes, became a media darling. However, as it turned out, the company’s technology was largely a fraud. In 2015, the Wall Street Journal discovered that Theranos’ blood tests were neither revolutionary nor accurate. The company’s downfall was swift, ending with criminal charges and the collapse of the once-promising startup. In the end, the Theranos story serves as a cautionary tale about the dangers of blindly trusting a charismatic leader and their “innovative” products.

From Numbers to Narrative

Transforming from a bean counter to a compelling storyteller is possible with a five-step storyboarding process. For valuation experts and quantitative analysts, it all starts with spinning a yarn that tells the story of the firm through its growth prospects, competitive landscape, managers and life cycle. The story must align with numbers and satisfy the “3P’s” test: Is it possible, plausible, and probable? Next, each part of the story should be backed up by numbers, including market potential, cash flows, and risk mitigation. Once a legitimate story and supporting data are in place, create a valuation model that ties everything together to determine the company’s worth. Finally, it’s essential to continually test the story and respond to skeptical critics, reassessing and changing the narrative as needed when economic shifts, management churn and new regulations occur. With these steps, quantitative analysts can become effective storytellers who convincingly convey the value of firms to investors.

Crafting a Compelling Valuation Narrative

To create a valuation narrative that truly resonates with your audience, there are several key strategies to keep in mind. Firstly, extensive knowledge about your company is essential for presenting a cohesive story. Additionally, different stakeholders will be interested in different aspects of your business. Finally, it’s crucial to show your audience the unique value that your company provides, rather than simply telling them about it. By following these guidelines, you can create a powerful valuation narrative that combines emotion with logic, captivates your audience, and successfully conveys the value of your business.

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