April 2021

The power of the narrative

Narratives help us make sense of the world and ourselves. Take globalisation. It was presented to us as an inevitable process, forging global champions in its wake. In the brewing industry, the narrative of “biggest is best” was countered by the craft brewers’ own narrative, which was modelled on the biblical story of David and Goliath. These narratives have reached closure. Do we still need a compelling new narrative to maintain a conversation around beer?

For some time, academics and psychologists have been talking about the importance of narratives, which cater to our need for sense-making and our desire to observe causality. In other words, we create stories to interpret what is happening around us. In turn, these stories build our understanding of the world and the lens through which we construct meaning.

The same holds true for industries and businesses. Whether it is selling beer or washing machines, they all rely on compelling narratives. Stories need not be accurate to spread. At their best, they are oversimplified models of reality, the Nobel laureate Robert Shiller argued in his book “Economic Narratives” (2019). He calls narratives “human constructs that are mixtures of fact and emotion and human interest and other extraneous detail that form an impression on the human mind.”

Irrespective of their origin, which is often uncertain, it matters that they prove contagious and become part of common wisdom. What makes stories powerful is not necessarily the facts, but how they create meaning in the hearts and minds of the listeners. To do so, they need to be vivid, coherent and memorable. Narratives’ impact can be immense, Mr Shiller said. They can move markets and drive the business cycle. In fact, they can sway decisions to hire or fire; to buy or sell; to spend or save.

Powerful narratives are clearly manifest in today’s financial markets. It may annoy the logical thinkers, the Numbers People, who believe that company’s valuation should be about hard data and that narratives are a distraction because they bring irrationalities into the investing process. Narrative People, on the other hand, maintain that investing is all about great stories, and that it is hubristic to base forecasts on logic and numbers when the future is uncertain.

The American electric vehicle and clean energy company, Tesla, is the poster boy of this narrative world. In terms of revenue, Tesla trails both Toyota and Volkswagen, the world’s biggest car manufacturers. Its 2020 revenue was USD 31 billion, compared with Toyota’s USD 275 billion and Volkswagen’s USD 248 billion. But Tesla’s market value of USD 686 billion (end of February 2021) was 3 times Toyota’s (USD 212 billion) and 6 times Volkswagen’s (USD 114 billion).

Why is that? Tesla’s investors can also see the firm’s current financial figures. They are no fools. It is simply the difference in the narrative, argues River Valley Asset Management. “Tesla’s narrative includes ‘changing the world’, ‘master disruptor’, ‘on the right side of the environmental movement’, ‘way ahead on autonomous driving’, etc. Also, they have a master narrator in the cult-like figure of Elon Musk, whereas few will know the name of the head of Toyota and Volkswagen,” River Valley’s fund managers say.

Storytelling and globalisation

When we wrote our book on the globalisation of the brewing industry (Ina Verstl & Ernst Faltermeier, The Beer Monopoly), it struck us how the narrative of globalisation as an inevitable process, which is still beneficial to all, often triggered reckless deal-making. It was as if industry leaders were yielding to the narrative instead of proactively writing their own. However, the beauty of the globalisation narrative was that deal-making in the brewing industry became more than just a series of seemingly arbitrary takeovers.

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