Stats, Graphs, Data, and now – Science. Why is science relevant? Isn’t good judgement important?
Science is: “the systematic study of the structure and behavior of the physical and natural world through observation and experiment.”
So how does this relate to valuation? First, we can get rid of a big chunk. Appraisers cannot do experiments. Appraisers must rely on observation of what already exists in “the natural world”. If anything, this is an objective of valuation – to rely on what actually has happened (sales), rather than what could have happened, or what hypothetically could be construed to have happened.
Can we get rid of another chunk? Do appraisers work with the physical world, or the natural world? Physical science usually includes physics, chemistry, geology, and astronomy. Natural science usually includes things from nature, including biology, human behavior, and arguably – economics.
While appraisal inherently involves physical property, the valuation study itself is about human economic behavior. This is the study of the interaction of human beings. Beings who act on both economic cues and personal preference cues. (Income properties vs. amenity properties). The physical properties provide data to measure and classify human responses and interactions
As we considered in Part IV of this series — appraisers work with whatever data is available or can be mined. Valuation analysts work with data in two types: 1) data that can be used as is; and, 2) data that has to be generated — personally observed, calculated from existing data, or enhanced by further data mining (called verification).
So, for the purpose of valuation, or asset analytics – we can reduce our definition to one appropriate to valuation data science. We can say:
[themify_box color=”white”]Valuation is the systematic study of the structure and behavior of the natural world through observation.[/themify_box]
This is important. For example, the analysis is not the study of the population all the houses in a neighborhood. Our analysis is the study of all the measurable human interactions in a market segment. The measurable human interactions are called “sales”.
How about judgment? Will science replace appraisers? NO. Not at all. Science itself requires human involvement.
Art is part of science. Think of the harmonic ratios of music. The perspectives and ideal proportions of drawings. The kinetic balance of dance. The physical/sexual response to body proportions. Science in art.
Similarly, science is part art. Abductive reasoning is required to identify a subject of a study, and the initial direction of search. (Appraisers call it scope of work.) Deductive reasoning is needed for the categorizing function. (Such as “Is it a comp, or not a comp”.) And measured association requires inductive reasoning. (Appraisers call it “making adjustments”.)
But wait, there’s more! Competent human judgment is required as an analysis progresses. We call it modeling. As an asset analysis proceeds, the subject-matter expert, the appraiser – must make modeling decisions. A valuation goal, the appraised value, has three parts. Scientists call it accuracy, precision and relevance. For our purposes we can call it with three simpler words:
- Trueness – are we getting the right answer?
- Sureness – how reliable is our answer (the range)?
- Suitability – was the right question asked?
In part VI, the last of this series, we will summarize how Valuation Data Science compares with traditional classical opinion-based valuation. Yes, judgment and art are still required. Evidence-Based Valuation© emphasizes the words “see the analysis, see the result.”
Data science sharpens and heightens appraiser judgment. It does not replace it.