Narrative and Numbers: The Value of Stories in Business

by Aswath Damodaran

Let’s assume that you live in big data heaven, where you and everyone else has huge databases and powerful computers to analyze and make sense of the data. Since you all share the same data, and perhaps even use the same tools, you are going to highlight the same opportunities, generally at about the same time, and seek them out for profit. That process is going to create “herding,” when you buy and sell the same stocks at the same time. So what? That herding will create momentum, which will reinforce your decisions at least in the short term but will also cause you to be collectively wrong if there is a structural shift in the underlying process (business, market, or economy). The data, after all, comes from the past, and if the future is going to be different from the past, the consequence of the structural shift, the predictions based upon the data will come apart. The implications are sobering. As we move increasingly to a data-driven world, and more and more people have access to that data, it stands to reason that we will see more booms and busts than we have historically. Bubbles in markets will be bigger than they used to be and when these bubbles burst, as they inevitably will, the carnage is going to be greater as well.