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Stats and stories: why valuations need both

Aswath-DamodaranIn a recent blog post, Dr Damodaran (Professor of Finance at New York University and something of a ‘valuation celebrity’) highlights the need for both numbers and narrative when valuing a business:

“If you do a good valuation, it’s like composing a tune,” He says. “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.”

Many valuers suffer from the illusion that numbers ensure precision, objectivity and control, he explains. Yet figures can be just as biased as words, and worse are protected by the belief that ‘numbers don’t lie’. Damodaran underlines a few key dangers of a numbers-heavy approach:

-         the valuations become mere tools used for sales pitches or to confirm pre-conceived values

-         endless line items can lead to the creation of a business that only exists in ‘spreadsheet nirvana’, not to mention hair-splitting about inputs

On the other hand, Damodaran warns against narratives unrestrained by numbers, which can fast become fairy tales. Further, relying solely on narrative makes measuring progress difficult, as it provides no obvious benchmarks.

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