Episode 69: Aswath Damodaran

FinanceAccounting

Nov 17

Written By Michael LaBlanc

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Narratives and Numbers: Understanding The Value of Stories in Business

Can a company with no profits be valued at a multibillion-dollar level? Why do some start-ups receive large investments while others do not? Aswath Damodaran, a finance professor, and experienced investor, argues that corporate value comes from the power of stories, enticing even cautious investors to take risks. He emphasizes the importance of integrating compelling narratives with strong data-driven models and accounts to deliver and sustain value.

Aswath talks about case studies like Uber, Lyft, and Amazon, describing how storytellers can better incorporate and share the stories behind the numbers. Listen as he reveals the benefits, challenges, and pitfalls of weaving narratives around the numbers and how one can best test a story's plausibility.

Episode Quotes:

How did you realize that you had these other latent capabilities, which you had to consciously cultivate?

“Now we think of valuations as numbers in a spreadsheet, but ultimately valuations tell a story. And I discovered that without being able to tell the story, all I had were a collection of numbers in a spreadsheet. The other half forced me to think about how can I become a better storyteller,was the need to be able to tell stories that backed up my valuations. So on both fronts, both the teaching front and when I was teaching valuation, I was kind of forced to deal with the fact that storytelling was my weaker link. The nice thing is, you can learn to tell stories, and that's what I've discovered over my lifetime. Even if you start off, not as a very good storyteller, you can end up as a pretty decent storyteller.”

Do stories as something that get in the way of data?

“So, I respect data. I work with data all the time. But I also realize how easy it is to bend data, to reflect your biases. And I actually think stories are a great way to make sure you're not bending the data. That's why you need both.”

At a time when we're drowning in data, why is it critical to tell stories that allow you to search for information with focus?

“Data does not become information until it goes through a processing. We're drowning in data. We're actually not getting information from that data. And one of the reasons I tell stories is it allows me to look for the data that I want at that point in time.”

Thoughts on having to experience value business to fully understand how to value business

“But I think, sometimes, we think that listening to CEOs of large companies is how we understand business. I learned more about business from my Uber driver and my hot dog stand vendor than I do from CEOs of companies. Because it forces you to think about basics, which is, you know, if you want to sell more, what do you have to do? You’ve got to cut prices, or you've got to somehow create this special extra that allows you that pricing power.”

How can other disciplines like humanities and social sciences help build critical thinking?

“I think we need to be multidisciplinary in every one of our classes. So, when I teach my valuation class, I have a lot of psychology in there. I have a lot of storytelling. A lot of strategy. I have a lot of statistics because they're all part of what I'm trying to convey when I do a valuation. And I hope and pray it sticks better because it's always in context.”

Time Code Guide:

00:03:40: How Aswath consciously learned the science of storytelling
00:05:49: Thoughts about psychologists and behavioral economists saying that stories dangerous and can get in the way of distracting you from the data
00:09:58: Two kinds of storytelling architecture: word-driven and narrative, and data-driven
00:11:43: Access to data, simplistic but curious ways of looking at smaller data sets
00:14:25: The need to stress test and try your stories with data
00:17:33: The need to test and try your stories with data
00:23:19: Game theory and financial forecasting
00:25:57: Telling a big story to attract investment
00:28:35: Cautionary tales of when arrogance overrides sense
00:31:33: How do you become someone who's capable of evaluating the stories in behavioral finance?
00:36:13: Different and communities find different stories compelling
00:41:31: Going out to get better data and exposing yourself to alternative narratives
00:48:02: Anecdotes and relying on data

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Michael LaBlanc