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

by Aswath Damodaran

How can you adapt and control storytelling in the context of valuing businesses and making investments? You begin by understanding the company you are valuing, looking at its history, the business it operates in, and the competition, both current and potential, it may face. You then have to introduce discipline into your storytelling by subjecting your story to what I call the 3P test, starting with the question of whether your story is possible, a minimal test that most stories should meet; moving on to whether it is plausible, a tougher test to overcome; and closing with whether it is probable, the most stringent of the tests. Not all stories that are possible are plausible, and among all plausible stories, only a few are probable. Until this point, you are primarily on the storyteller’s turf, but you now have to follow up by explicitly linking your tested story to numbers that determine value, that is, the value drivers of a business. Even the most qualitative stories about corporate culture, management quality, brand name, and strategic imperatives can and should be connected to value inputs. It is those value inputs that should become the numbers in models and spreadsheets that lead to the value assessments on which you base your decisions. There is one final step in this process, and it is one that most of us find challenging. If you tell good stories, it is natural to get attached to them and to view any questioning of those stories as an affront. While it is good t...