Narrative and Numbers: The Value of Stories in Business (Columbia Business School Publishing)

by Aswath Damodaran

a sophisticated measurement tool, is that you may not only let the numbers overwhelm your common sense but that you will not prepare yourself properly for the dangers ahead. That, unfortunately, was what happened at banks around the world during the banking crisis in 2008. In the two decades prior to the crisis, these banks had developed a risk measure called “value at risk” (VAR), which allowed them to see in numerical terms their worst-case scenarios in terms of losses from their businesses. In the intervening period, risk-management experts and academics refined VAR to make it more powerful and more complex, with the stated intent of making it more effective. As bank managers became increasingly reliant on VAR, they also let down their guards and concluded that if the computed VAR was within their defined safe limits, their risk taking was also under control. In 2008 that delusion fell apart, as the weaknesses in VAR’s core assumptions were exposed and banks that