How Evaluation Acts as a Bridge Between Numbers and Narrative Essay Example

a story that is at war with the numbers, and remember that the numbers can be both strongly good or strongly bad. Either way, your story has to work within the numbers”. Thereby he clearly lays down the rules of the game in its most crisp manner.

While he attempts to capture the definition of both storytelling and numbers in the first chapter, he takes a step further and discusses how valuation acts as a bridge between numbers and storytelling. An interesting proposition indeed as he talks about one empowering the other in a mutual setting if used wisely. Another very important takeaway from this chapter that Damodaran talks about is testing if the storytelling is “possible, plausible and probable” and only if the storytelling passes this three-filter test should it be considered being infused to the business’ numbers.

In his next chapter, the author asks one “tell me a story” and talks about how storytelling has been central to our learning and that it holds “so much power over us”. Just as it starts to get overwhelming, Damodaran sheds light on exactly what flavour does storytelling add to the whole recipe of valuation. He talks about how stories have the ability to connect. Rightly so, stories can connect with a person irrespective of whether they understand businesses, valuations or numbers. Another significance of stories is that they have the ability to be remembered. With a rather scientific tone, Damodaran highlights that researches and researchers have extended the hypothesis that the causal connection within stories make them memorable. Almost as if he’s narrating directions, he talks about how, after connecting and being remembered by the audience, effective stories

spur action too. Holding onto the findings from Paul Zak, the famous American Neuroeconomist, Damodaran points out how Zak studies the increase in the levels of oxytocin, the neurochemical that played a role both during listening to stories as well as when stories spurred action.

Almost on cue, Damodaran, like a true blue storyteller, introduces example of the ‘hero’ of his narrative; Steve Jobs, arguably the most admired storyteller the modern world has ever seen. Although he puts a leash to it and warns that even the best storytelling will fail and that there are no guarantees, even if the story is told by a certain Steve Jobs!

Diving deeper into “the elements of storytelling”, Damodaran proposes Aristotle’s Poetics, and that it’s the first formal description of what a story requires; a beginning, a middle and an end, and something that holds all three together, the protagonist.

Interestingly, almost as if after having given a narrow but attractive teaser, the author presents a style of storytelling for different types of businesses. Whether it’s the story of an underdog, a better mousetrap, the disruptor or the missionary, one who presents itself as having a larger, more noble cause than just making money.

As he concludes, a list of four elements of storytelling is mentioned saying:

The story needs to be simple, free of distraction and one that eliminates any complexities whatsoever.

A story that has credibility. Without hard selling the story, it should be embedded with realistic assessment of the business’ limitations while also presenting its strengths.

An authentic story that resonates with the personality of the storyteller and speaks what the business is truly about.

Coming from the heart and one that expresses the

passion, if any, that the business holders have. This will bring the emotional connect that is all too desired between businesses and all of its stakeholders.

Almost like any parent that is fair to both their children, Damodaran introduces the other pillar of his book; the numbers. Talking about “the power of numbers” he talks about how numbers are precise, giving the example of the movie Moneyball and how after ages working on word of mouth, Baseball matured into realizing how numbers tell a precise story. Further, he talks about how numbers are objective. Like a very straightforward science experiment where we propose a hypothesis, conduct an experiment, collect the data or the outcome and either accept or reject the proposed hypothesis. Like the perfect icing on the numbers’ cake, the fact that numbers project control is the third, most important trait. In his own words, “if you cannot measure it, you cannot manage it”

When I asked him about his thoughts on Facebook having a strong storytelling but not Whatsapp and it still ‘surpassed’ Facebook in terms of popularity he says, “I think that you are mistaking a good story for a strong one, You can have a strong good story (like Facebook) or a strong bad story (like GE). They are both strong stories. Whatsapp is a component of Facebook’s story. It does not make any sense to tell any standalone stories about a bit player in a bigger story.”

However, again showing the flipside of excess dependence, Damodaran advises that numbers have the ability to give the illusion of precision, owing to their definitive nature. Further, Numbers are like clay, they’ll remain true to the shape

you give them, but also that they will change shape according to your whims, and therefore, numbers project the illusion of objectivity. Again, owing to the definitive outlook that numbers command, they offer an illusion that the reader has control, without realizing that no matter how accurate, numbers are slaves to the narrator after all.

Going a step further and hammering the proverbial last nail in the coffin, the author talks about how one walks a dangerous line when projecting numbers to their audience. From knowing that numbers are generally intimidating to the audiences, to imitation being a problem where a cheaper number cruncher and do your job as well as you, if not better and how the Lemming problem, where everyone has the same amount of big data, same kind of tools will result in same results and thus will reinforce momentum in the short run but will collapse when there is a shift in the fundamentals, whether and the business, market or economic level. He ends the chapter with proposing storytelling as the antidote, just as he proposed numbers as the sobering antidote to storytelling earlier.

Having driven home his point regarding the role and limitations of both storytelling and numbers, Damodaran takes the discussion further by talking about “number crunching tools” and how one needs to go about collecting the data and the choices we make about it; accounting versus market data, local versus global data, quantitative versus qualitative data etc. While the avenue of data choices might look lucrative, Damodaran does another sober act and talks about the collection biases, bias of the survivor, which in fact was a very interesting analogy that talks

about the skewed nature of data if only the ‘survivor’ data is collected (think using only the age of people currently alive to calculate median life expectancy rate) and another bias that is caused by data noise and error. I think another, less popular bias, the word I love to describe it being ‘the housewives’ bias’ covers the trivial factors that affect literally the mood of anyone involved in the data crunching chain. The terms is taken from a fictitious data collector’s life who happen to have had a rather bad morning, owing to an argument with his wife who for some reason chooses the morning time to crib and complain to the data man. He’d look at numbers and deal with them in a starkly different manner, depending often entirely on how his morning started; an upset wife, a flat tire, a promotion, birthday or just about anything from within the life of the data man.

Before we move further, I asked Professor Damodaran about his thoughts on ‘The Fickleness of Memory’ and how manipulation can convince people of things that have never even happened and whether he sees anything unethical in this kind of manipulation? He lays down his thoughts saying “By definition, manipulation suggests that you are bending reality. It is human nature to do so, and explain it away by arguing that you have a larger and more noble purpose. Politicians do it, CEOs do it, spouses do it.. In other words, all human beings do it. I will leave it to someone with better spiritual standing to make a judgment on the ethics.”

With the basics of his book in place, we move

ahead with what more the book has to offer.

By now the author has established a process for one to follow when in the valuation of a company and with atomic clockwork precision, Damodaran ups the ante even further by showing that there’s more layer to the seemingly straightforward concept. Maneuvering the discussion through how simplicity, credibility, inspiration and action oriented narration is key, he takes us through the steps that lead to a solid narration. Beginning with the pre-work where a base is created that enables all stakeholders to be at par, leading onto how starting with the company is a good idea, although my opinion is that for a company that’s been in business, this aspect is easier while for a new company, their inherent disadvantage lies in not having too much history to their narrative. Taking this in the broader domain and discussing the proverbial elephant in the room, Damodaran invites one to discuss the market and even your competition within your narrative! The author argues that it places one well in the context of growth, profitability, investment and risk, by way of assessing and discussing the market outside of the business and very much into the competition, future prospects and growth potential of the whole industry’s ecosystem.

In the next chapter, while talking about “test driving a narrative”, the author discusses how to weigh a narrative before absorbing it into one’s valuation decision making. Asking questions like whether the story is possible or just an extension to someone’s vivid imagination. Another benchmark, derived from Damodaran’s 3 Ps; Possible, Plausible and Probable, to check for is to see whether a business is being showcases

as bigger than the economy or market it participates in. Like a pied piper, profit has long been the single most attractive aspect for investors but Damodaran advises caution