Narrative and Numbers: The Value of Stories in Business
Summary
Aswath Damodaran teaches valuation at New York University and argues here that valuation requires both a business narrative and a set of numbers, and that most analysts do only one. Storytellers produce plausible accounts that cannot be tested; number people produce spreadsheets whose assumptions have no justification. His proposal is a discipline for connecting them.
The process he sets out has steps. Develop a narrative about what the business will become. Test it against three standards: is it possible, is it plausible, is it probable. Convert each element of the narrative into a specific input, so that a story about becoming the dominant player in a market becomes an assumption about total market size and market share, and a story about operating leverage becomes an assumption about margins. Value the company from those inputs. Then keep the narrative under review, distinguishing narrative breaks, where the story is wrong, from narrative changes, where circumstances have altered it, from narrative shifts, where the details move within the same story.
He works this through on cases, most extensively Uber in 2014, where his valuation of roughly six billion dollars against a private round at seventeen billion turned on whether Uber was a car service company or a logistics company. He publishes his own errors, including his initial underestimate of Uber's market expansion. The method is genuinely useful and the discipline of converting narrative claims into specific inputs is the transferable part. The book is repetitive, and readers who follow Damodaran's blog will find much of it familiar.
Key takeaways 7
- A valuation without a narrative has assumptions that cannot be defended, and a narrative without numbers has claims that cannot be tested.
- Every element of a business story must convert into a specific valuation input, or it is not doing analytical work.
- Narratives should be tested against whether they are possible, plausible and probable, and most investment stories fail at the third.
- Defining the market a company competes in determines most of the valuation, and disagreements about value are usually disagreements about market definition.
- A narrative break, where the story turns out to be wrong, requires selling, while a narrative change requires revaluing.
- Damodaran argues that uncertainty is not a reason to avoid valuation, since the alternative is pricing without any anchor.
- Young companies should be valued from a story about the business they will become rather than from extrapolating current financials.
Who should read it
Investors valuing companies without long operating histories who want a repeatable method for turning a business thesis into defensible numbers.
About Aswath Damodaran
Kerschner Family Chair Professor of Finance, NYU Stern School of Business
His valuation textbooks and freely published datasets are the default reference used across academia, banking and investing.
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