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Narrative and Numbers

Aswath Damodaran

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To talk about a business you need both valuation (numbers) and story (narrative). Stories work best when they not only involve listeners but make them think on their own and make their own connections.

Stories make emotional connections. They are remembered longer and more clearly. And they are more effective in promoting action.

We live in an age with access to a huge amount of data and information. Almost paradoxically, this has fuelled a demand for stories to make sense of all the numbers. We focus on small sets of data we can access and understand, but have trouble seeing the big picture.

Bernie Madoff had a good story: he claimed he could buy 50 of the top 100 stocks at the best time, and then using put options, could limit his losses. There were three ingredients to his magic story. First the strategy was 'too complicated for outsiders to understand' and too proprietary to be described in detail. The second was that it was supposedly so well designed thast it wd not lose money, even in bad market months. The third, and smartest ingredient was that he promised moderate rather than exceptionally high returns.

Aristotle one of the first to explain structure of a successful story. Every story needs a beginning, a middle and an end, and what keeps it going are the linked incidents within the story. We expect the protagonist to see a change of fortune over the course of the story.

Stories create connections and get remembered, but numbers convince people. They give a sense of precision to even the vaguest stories.

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