Dr. Aswath Damodaran (Stern School of Business, New York University) has often talked about the dangers of using numbers without any narrative when constructing valuations. Now, he has put all of his thoughts together in his own narrative.
New book: Damodaran’s new book, Narrative and Numbers: The Value of Stories in Business, is available here. One danger of too much emphasis on numbers is that valuations become “plug-and-point exercises, tools to advance sales pitches or confirm pre-conceived values,” he says. A valuation needs a marriage of narrative and numbers. “In a good valuation, the numbers are bound together by a coherent narrative, and storytelling is kept grounded with numbers,” he says.
In fact, it is this combination of narrative and numbers that attracted Damodaran to valuation in the first place, he told Business Valuation Update in an interview. “I didn’t want to become an accountant. It’s too numbers-driven for me. I didn’t want to be a strategist because it’s too much storytelling. So in a sense, I wanted something that would help me expand the creative component of business—coming up with great valuation ideas with discipline. So that’s what always attracted me to valuation. Not the model-building, not the spreadsheets, not the number-crunching, and not the accounting.”
He continues: “It’s a fact that if you do a good valuation, it’s like composing a tune, and the tune should actually sound good. So it forces you if you’re a storyteller to be disciplined. And it forces you if you’re a numbers person to think about the narrative. And to me that’s an exciting place to be.”
Please let us know
if you have any comments about this article or enhancements you would like to see.