Does Not Compute

Not everything can be explained by numbers. In recent times, two eminent academics, one a Nobel laureate – Robert Shiller and the other Aswath Damodaran, both known for their works based on extensive quantitative methods, have published books about the importance of stories in understanding economics and business alike – Shiller’s Narrative Economics and Damodaran’s Narratives and Numbers. In this piece, Morgan Housel, known for his storytelling approach to articulating concepts, shows (with stories!) why not everything in investing either can be explained by numbers.

He quotes Jim Grant: “To suppose that the value of a common stock is determined purely by a corporation’s earnings discounted by the relevant interest rates and adjusted for the marginal tax rate is to forget that people have burned witches, gone to war on a whim, risen to the defense of Joseph Stalin and believed Orson Welles when he told them over the radio that the Martians had landed.”
“That’s always been the case. And it will always be the case.
One way to think about this is that there are always two sides to every investment: The number and the story. Every investment price, every market valuation, is just a number from today multiplied by a story about tomorrow.
The numbers are easy to measure, easy to track, easy to formulate. They’re getting easier as almost everyone has cheap access to information.
But the stories are often bizarre reflections of people’s hopes, dreams, fears, insecurities, and tribal affiliations. And they’re getting more bizarre as social media amplifies the most emotionally appealing views.”
He goes on to give examples of Lehman Brothers going bust, Gamestop coming back from bankruptcy, pictures of monkeys selling for a fortune – all numbers which don’t add up, before concluding:
“The first step to accepting that some things don’t compute is realizing that the reason we have innovation and advancement is because we are fortunate to have people in this world whose minds work differently from yours. Beyond Nash are people like Elon Musk and Steve Jobs, whose personalities are equal parts brilliant and absurd, and the absurd can’t be separated from the brilliant – you have to accept the full package. We’d never get anywhere if everyone viewed the world as a clean set of rational rules to follow.
The next is accepting that what’s rational to one person can be crazy to another. Everything would compute if everyone had the same time horizon, goals, ambitions, and risk tolerances. But they don’t. Panic selling stocks after they’ve declined 5% is a terrible idea if you’re a long-term investor and a career imperative if you’re a professional trader. There is no world in which every business or investing decision you see should align with your own view of the world.
Third is understanding the power of incentives. Bubbles are technically irrational, but the people who work in bubbles – mortgage brokers in 2004 or stockbrokers in 1999 – make so much money from them that there’s a powerful incentive to keep the music playing. They delude not only their customers, but themselves. Nothing gets people to look the other way like easy money.
Last is the power of stories over statistics. “Housing prices in relation to median incomes are now above their historic average and typically mean revert,” is a statistic. “Jim just made $500,000 flipping homes and can now retire early and his wife thinks he’s amazing” is a story. And it’s way more persuasive in the moment. If you look, I think you’ll find that wherever information is exchanged – wherever there are products, companies, careers, politics, knowledge, education, and culture – you will find that the best story wins. Great ideas explained poorly can go nowhere while old or wrong ideas told compellingly can ignite a revolution.
Novelist Richard Powers put it: “The best arguments in the world won’t change a single person’s mind. The only thing that can do that is a good story.”
It’s hard to compute, but it’s how the world works.”