ACADEMIC PAPERS The definition of

market value
The definition of market value
Criteria for judging proposed definitions
and an analysis of three controversial 159
components Received November 1996
Revised September 1997
Hans Lind
1. Introduction
The definition of market value has been controversial for a long time[1]. In
recent years, two developments explain an increased interest in this question.
The first is international standardisation of terminology, related to the
internationalisation of financial markets and the creation of a single European
market (Downie et al., 1996). The second is the real estate crises, that led to
discussions about the role that real estate appraisals played for the “bubble” on
many markets, and this put a focus on how clear the central concepts in the area
really were (The Mallinson Report, 1994).
A serious weakness in these discussions about the definitions of market
value is that there are no explicit arguments about what criteria to use when we
judge whether a certain proposed definition is satisfactory or not[2]. The
criteria used by different authors are implicit, and this means that two
controversies are mixed up: controversies about what criteria to use and
disagreement over whether a certain definition fulfils a specific criterion. In
section 2 below, there is an analysis of three types of criteria that seem to be
implicit in much of recent discussions concerning the definition of market value:
• The clearness of the definition: a good definition should not include
terms that are very vague.
• The measurability of the concept: a definition of market value should not
be such that it very seldom is possible to know even approximately what
the market value of a property really is.
• The relevance of the concept: we should not define market value in such
a way that actors on the market have no reason to care about market
value.
These criteria can be seen as an attempt to formulate necessary conditions for
a good definition, i.e. a definition must fulfil these in order to be a candidate for
a good definition. There are of course also other criteria for judging a definition,

The author would like to thank Professor Erik Persson for many valuable discussions and Journal of Property Valuation &
Investment, Vol. 16 No. 2, 1998,
comments and The Swedish Council for Building Research for financial support. Comments from pp. 159-174. © MCB University
an anonymous referee have also led to considerable improvements. Press, 0960-2712
JPVI e.g. Occam’s Razor, which in this context means that we should only include
16,2 components in the definition that add content and affect the use of the concept.
In section 3 we apply these criteria in an analysis of three classical
controversies:
• Should the definition of market value include the condition that the
parties act prudently and knowledgeably?
160
• Should the definition include conditions related to the willingness of
buyer and seller?
• Should the definition of market value refer to the probable price, the best
price that the seller can expect or the average price that the seller can
expect?
There are also a number of other controversies related to the definition of
market value. French and Byrne (1996) focus on whether the marketing period
is assumed to be before or after the date of value, and assumptions about the
length of the marketing period. These issues will not be discussed in this article
and there will be no attempt to formulate a new “complete” definition of market
value. The aim of the article is only to clarify criteria for a good definition and
analyse the three specific issues mentioned above.

2. Criteria for judging whether a proposed definition of market

value is satisfactory or not
2.1 Introduction
Three criteria were mentioned above – clearness, measurability and relevance.
It is important to distinguish between judging definitions and judging methods.
A good method is a procedure that gives the “right” result. A method to find out
the market value should produce a figure that is close to the actual market price.
But we cannot judge a definition by its correspondence to “the right figure”,
because the definition determines what are the relevant observations and the
right figure. If we have two different definitions of market value, we also have
two different actual market values (unless they by chance coincide), one market
value in sense one and one market value in sense two.
The natural strategy is then to first discuss definitions, and decide what
meaning is to be preferred (given, for example, the criteria above), and then to
discuss methods that can be used to determine the market value, given the
preferred definition[3]. In this paper we are only concerned with the first
question.

2.2 The definition should have a clear meaning

This criterion is rather obvious, but it is not so easy to specify what we really
mean when we say that we clearly grasp the meaning of a concept[4]. One view
is the following: to clearly grasp the meaning of a concept is to be able to use the
concept correctly. Suppose we look at a concept that relates to a certain type of
object, e.g. the concept “dog”. To know the meaning can in this case be the same
as to be able to correctly identify an object when we see it: we know the meaning The definition of
of “dog” when we (almost always) answer the question “Is this a dog?” market value
correctly[5]. From this perspective a concept has a clear meaning if people
seldom disagree whether a certain object falls under the concept or not. “Dog”
would probably be a good example of a very clear concept in this sense.
A second view concerning meaning focuses on knowing the characteristics that
something should have for it to be correct to use the concept in question. To know 161
the meaning of “dog” is then to know the characteristics that an animal must have
for it to be correct to call it a dog. Most of us use the concept “dog” without
knowing this, but it is interesting to observe that there exists an “intellectual
division of labour”: we are sure that someone – e.g. a biologist specialising in
mammals – knows what these characteristics are, and we know that we can ask
such a person if we wanted to know what really makes a dog a dog.
When we discuss definitions of market value, we presuppose a definition of
this second type, i.e. a definition where we specify a number of characteristics
that something must have for it to be correct to call it the market value. To say
that a definition has a clear meaning is then to say that the characteristics
mentioned in the definition are such that there are few controversies about how
they should be applied to specific situations.
Let us as an example take a preliminary look at the concept “prudent buyers
and sellers” that are included in some definitions of market value. Are these
concepts clear? If we look at a randomly chosen small dictionary of English we
can read”: prudent … careful; acting only after careful thought or planning”[6].
This illustrates that clear meaning is a matter of degree! The given definition of
“prudent” is satisfactory in a number of practical situations for deciding
whether a person was prudent or not, but there are also a considerable number
of borderline cases. The person thought and planned, but was it in such a way
that is reasonable to say that it was careful? If the number of borderline cases is
large, and people disagree about whether something fulfils the definition or not,
the next step would be to make the concept more precise by laying down some
criteria for judging whether something is careful thought or planning. This
further definition has probably to be related to the context: if a buyer of a hotel
property does not check planned changes in the transportation system close to
the hotel, then he or she isn’t prudent. But a buyer of a farm, in a location where
a change in the transportation system is extremely unlikely, does not have to
make such an investigation in order to be a prudent buyer[7].
The conclusion would then be that a concept has a clear meaning if it is
possible to agree on the characteristics that should used for defining the
concept and that these characteristics are such that, in most actual cases, it is
not controversial whether a certain case fulfils the definition or not.

2.3 It must be possible to find out what the market value is in a considerable
number of situations
Let me illustrate the point of this criterion with an example. The question “How
many dogs are there in the universe today?” is, according to the first criterion
JPVI above, a clear question. There seems to be no real problems with the meaning of
16,2 the question. However, we cannot answer the question, as there is no way of
knowing if somewhere in the universe there exists a planet, beside our own,
where there are dogs.
According to the second criterion we should demand that the concept of
market value is defined in such a way that, in a considerable number of real
162 situations, it is possible to find out what the market value is for a specific
property. In a world of uncertainty the answer might be in the form of an
interval, or a probability distribution, but the important thing is that in most
cases differently qualified valuers, starting from the same definition, would
arrive at approximately the same interval or probability distribution.
A problem with this criterion might be the word “possible”. In what sense
should it be possible to find out what the market value is? I think that a
reasonable interpretation is that this means something like “practically
possible”, i.e. we can find out the value if we are given a “reasonable” amount of
resources. We can then formulate the second criterion as follows.
A definition of market value must be such that in a considerable number of
situations the market value can be found with a reasonable amount of resources,
in the sense that, given these resources, qualified valuers, starting from the
definition, should arrive at approximately the same estimate (interval,
probability distribution) of the market value.
This criterion is related to the one used in The Mallinson Report (1994) where
it is stated that the definition should be such as to reach “highest achievable
degree of certainty and the narrowest room for divergence of view between
valuers” (p. 23). It is further said that there should be few subjective judgements
(p. 24) as these would undermine the reliability of the definition. A definition is
said to be reliable if there are no “doubts about the valuer’s ability in all markets
and for all properties to reach a proper (value)” (p. 28). A difference between my
criterion and the definition suggested in The Mallinson Report is that Mallinson
demands that the definition must be such that it is possible to determine the
market value of all properties in all markets. I think that it is very difficult to
find a definition that fulfils such a criterion! Sometimes we must accept that it
is not possible to know even an approximate probability distribution of the
market value of a property. Classic examples are properties with many special
characteristics, that are valued in turbulent times, when there are few
transactions and much uncertainty about the future development of the market,
e.g. after a crash in the real estate market.

2.4 Relevance for actors on the market

One type of criterion for judging a definition is to relate the definition to some
kind of pre-interpretation of the concept. In a stipulative definition it is possible
to give a term any meaning you want, but it is usually rather pointless to give a
term a meaning that is far from some kind of everyday meaning of the term,
even though the latter may be somewhat vague. From this perspective it is
reasonable to demand that we should define market value in such a way that
knowledge of market value is relevant for actors on most real estate markets. If The definition of
we define market value so that actors on the market most of the time are not market value
interested in knowing the market value, then something is wrong with the
definition[8]. This raises two further questions: which actors, and what do we
mean by relevance in this context?
As a minimum demand, it seems reasonable to argue that market value
should be defined in such a way that it is relevant for most buyers and sellers of 163
real estate (including persons contemplating a buy or a sale). The qualification
“most” is related to the fact that actors on a market are very heterogeneous. We
can imagine a situation where an owner of a specific property has a very high
reservation price and where someone for personal reasons is prepared to pay a
high price for that specific property, even though there are very similar
properties on the market. If we define market value in such a way that the
concept becomes irrelevant for these actors, I would not draw the conclusion
that something was wrong with the definition.
Market value, according to a definition that makes the concept of interest for
most buyers and sellers, might also make the concept an interesting one for
other actors – banks, other credit institutions, owners not contemplating sales,
shareholders in property companies, etc. As I see it, it is not necessary that a
definition of market value makes the concept of interest for these groups. We
can imagine situations where such groups are interested in other things than
persons contemplating buying or selling. It is then sufficient that market value
is defined in such a way that most actual (and potential) buyers and sellers are
interested in the market value so defined.
A concept like relevance can be given both a more subjective and a more
objective interpretation. Subjective interpretations basically say that market
value is relevant for a certain group if most persons in that group in fact are
interested in knowing the market value[9]. More objective interpretations of
relevance could, for example, focus on whether a certain group could gain by
knowing the market value or that rational actors on the market would be
interested in knowing the market value.
If we start from the fact that markets are complex, heterogeneous and fluid it
might be too much to demand that buyers and sellers at all points in time must be
interested in knowing the market value, given a certain proposed definition. In a
longer perspective we should, however, expect that objective and subjective
interpretations converge. If actors could gain by knowing something then we
should expect them to be interested in getting information about this, unless there
are special circumstances. An objective interpretation focusing on rationality
would be rather uninteresting if most people most of the time are irrational!
The problem with the objective interpretation of relevance is, paradoxically,
that it might lead to more subjectivity. Different persons may give different
interpretations to rational, and have different views about what would gain a
certain group. My preference is then for a subjective definition, but not a
definition related to a specific moment in time. Market value would then be
relevant for a certain group if most people in this group most of the time are
JPVI interested in knowing the market value. For the purpose of this article it is not
16,2 necessary to specify what “most” means in these contexts!
We can then summarise our third criterion as follows. A definition of market
value must be such that most buyers and sellers, and persons contemplating
buying and selling, most of time, are interested in the market value – so defined
– of a property.
164 The arguments in Shlaes (1993) illustrate a case where there seems to be
some confusion between different criteria, and between problems of definitions
of value and estimation problems. He writes:
The problem with the usual definitions, people are saying, is that they don’t mean anything
anymore. Transactions are too few, sellers too unwilling, buyers too greedy, and financing too
scarce or peculiar for the market to satisfy the conditions described… (p. 71).
The trouble is that these ideal conditions are seldom, if ever, met in the investment real estate
markets of today… As a result [the definitions] just don’t work anymore (p. 73).
If we look at this formulation is seems rather unclear whether there is a problem
of vagueness (the definition does not mean anything), a problem of relevance
(ideal conditions not met and people therefore not interested) or a question of
too little evidence for knowing the actual value figure.

3. Application of the criteria: an analysis of some controversial

components in definitions of market value
In the introduction we pointed out three controversial aspects: should the
definition of market value include conditions that the parties are prudent and
knowledgeable; should it demand that buyers and sellers are willing; and
should the definition refer to the probable price, the expected price or the best
price? In this section we will look more closely at these three issues, given the
criteria for a satisfactory definition.

3.1 Should the definition include a reference to prudence and information?

Examples of definitions that include conditions about prudence and
information are the following:
(1) “Market value is the estimated amount for which an asset could
exchange on the date of valuation between a willing buyer and a willing
seller in an arm’s length transaction after proper marketing wherein the
parties had each acted knowledgeably, prudently, and without
compulsion” (TIAVSC, 1995)[10].
(2) “The most probable price, as of a specified date, … for which the
specified property rights should sell after reasonable exposure in a
competitive market under all conditions requisite to fair sale, with the
buyer and seller each acting prudently, knowledgeably, and for self-
interest, and assuming that neither is under undue duress” (The
American Institute of Real Estate Appraisal, 1992, p. 20).
A classical definition not including this condition is the following:
 (3) “The most probable selling price…(given a period of time … in The definition of
accordance with the typical market behavior for this kind of property).” market value
(Ratcliff, 1965, pp. 36, 38).
Inclusion of a condition concerning prudence and knowledge have been
questioned on all three grounds discussed in section 2[11]:
(1) Clearness of meaning. What shall we really demand of an actor to call 165
him or her prudent and knowledgeable?
(2) Measurability. Is it really possible to find out whether certain actors acted
prudently and knowledgeably, and is it therefore possible to judge
whether certain observed prices can be used as evidence about the market
value if we demand that actors acted prudently and knowledgeably?
(3) Relevance. Are not most actors interested in what they actually might
get, or actually have to pay, in the current market, and not the price in
some hypothetical market where actors have characteristics that might
differ from the characteristics that actors on the actual market have?
Locke and Horsley (1991) argue against the inclusion of such conditions, saying
that “the abstraction from reality has gone beyond ad absurdum” (p. 30).
If we look closer at the three criticisms mentioned above, the problems
concerning the meaning of conditions about prudence and knowledge seem to
be minor. In the commentary to the TIAVSC and RICS definitions we can read
that the definition “presumes that (both parties) are reasonably informed about
the nature and characteristics of the asset, its actual and potential uses and the
state of the market.” As was discussed in section 2 this type of definition can be
made more precise if necessary, and I see no reason to doubt that a rather wide
agreement can be reached about the way to make the definition more precise if
that should be necessary.
The problems related to measurability seem to be more serious. For example,
when the appraiser should judge whether a certain observed price is relevant
for forming an opinion about the market value, he would have to investigate
whether the actors in that case acted prudently and knowledgeably. In practice,
such investigations seem to be very unusual and the conclusion would then be
that appraisers do not follow a definition of market value that includes
conditions about prudence and knowledgeable actors. It would, according to
this argument, be impossible to know what is relevant evidence if we include
conditions about knowledge and prudence, and therefore it would be impossible
to form an opinion about market value.
However, there are at least two problems with this criticism. The definition
basically says that it is assumed that actors did not act careless. The appraiser
can have good reason to assume that carelessness, that significantly affects the
price, is unusual. Therefore, it would be rational only to investigate cases where
the price seems odd, and such investigations seem to be a part of the normal
procedure of the appraiser.
JPVI A second argument against the measurability criticism is that even if we do
16,2 not include conditions about the characteristics of the actors in the definition of
market value, the conscientious appraiser would still have to form an opinion
about the characteristics of buyers and sellers. Suppose we just define market
value as the most probable price. When we estimate the market value, so
defined, we use as evidence observations about prices in recent transactions
166 (perhaps adding adjustments for inflation or stable trends in real estate prices).
However, if the characteristics of the actors have changed between the time of
valuation and the date when the earlier sales were made, then the appraiser
should make adjustments to take this into account. An example could be a
situation where rich foreign investors with less knowledge of local conditions
start to act on a certain market. It is also the case that if a certain price was paid
because one of the parties acted carelessly, such an observation should be given
less weight as evidence if such carelessness is an exception. Therefore
information about the characteristics of the actors is relevant even if these
characteristics are not included in the definition of market value.
The general conclusion concerning criterion 2 is then that problems of
measurability are not good arguments against including conditions about
prudence and knowledge in the definition of market value.
The third argument against including these conditions – the argument about
relevance – seems to be the most important one. Why should actors on the
market be interested in what the price may be in a situation that might differ
considerably from the actual situation? If we want a concept of market value
that most actors most of the time can be expected to be interested in, then it
seems wise to relate the concept to the actual market and the actual
characteristics of the agents in that market.
The conclusion is then that the definition of market value should not include
conditions about prudent and knowledgeable actors. A definition of the type
presented by Ratcliff is to be preferred compared to a definition of the type
presented by TIAVSC/RICS. But it must be remembered that an appraiser still
must form an opinion about the prudence and knowledge of buyers and sellers
to be able judge the relevance of observed prices for the current appraisal.
If we define market value in relation to the actual market, one effect might be
that market value becomes less relevant in some situations, e.g. when
compensation should be determined[12]. Suppose that sellers on a specific
“thin” market are not very prudent and knowledgeable: the market value is low
compared to what it would be if sellers were prudent. If the state expropriates a
property on such a market it might be judged who compensation based on
market value would be unfair. Should an owner who might have no interest in
selling at the current market price, and have difficulties in finding a comparable
object, lose money just because other sellers have not acted prudently? However,
this observation is not a strong argument for including conditions about
prudence in the definition of market value. Instead, the legal rules concerning
compensation could refer to a hypothetical market value – what the market
value would be if the parties were prudent and knowledgeable[13]. A further
lesson of this might be that reasoning in courts about value and compensation The definition of
may not be very relevant when we discuss a concept of market value relevant market value
for normal transactions on the market.

3.2 Should the definition include conditions about willing seller and/or willing
buyer?
The TIAVSC definition above includes both these conditions, while the Ratcliff 167
definition does not include any of them. A third alternative is the RICS
definition which includes a condition that there is a willing seller, but does not
make any explicit assumption about buyers.

Does the condition have a clear meaning?

Whipple (1994) argues, with reference to economic theory and concepts of
demand and supply, that the willingness of a buyer and a seller always is
related to specific price: a person is a willing buyer at price P if the person would
like to buy at this price, and a person is a willing seller if he wants to sell at that
price. This implies that “willing buyer” and “willing seller” have no clear
meaning as the willingness is contingent on the price for the property.
Whipple’s conclusion is that no conditions about willingness of sellers or buyers
should be included in the definition.
This critique is, however, somewhat unfair. If we look at the explanatory
appendix to the TIAVSC definition we can find the following comments:
[a willing buyer] refers to one who is motivated, but not compelled to buy. This buyer is neither
over-eager nor determined to buy at any price. This buyer is also one who purchases in
accordance with the realities of the current market, and with current market expectations (p. 4)
[a willing seller] is neither over-eager nor a forced seller, prepared to sell at any price, nor one
prepared to hold out for a price not considered reasonable in the current market. The willing
seller is motivated to sell an asset at market terms for the best price attainable in the open
market after proper marketing, whatever that price may be (p. 4).
These explanations show that there really are assumptions about the price
behind the condition about willingness. To simplify: a seller is willing, only if
the person does not demand an unreasonably high price and does not accept an
unreasonably low price.
But these comments also raise new problems: what are “the realities of the
current market” and “a price not considered reasonable in the current market”?
How can the appraiser know what is a reasonable price, before he/she
determines the market value? In many cases it must be difficult to apply these
conditions because of controversies about what these realities of the current
market are.
The second part of the explanation of “willing seller” is very interesting and
somewhat inconsistent with the other parts of the explanation. The willing
seller sells at any price, if the asset is sold after proper marketing. This
explanation invites the use of Occam’s razor: instead of including references to
willing buyer and seller we just define the market value as the price that can be
JPVI expected if a property is put on the market and if it is sold after proper
16,2 marketing. Given the commentary above, the content would not be changed by
adding conditions on the willingness of buyers and sellers, and therefore there
is no point in including such a formulation.

The question of measurability

168 We can be very brief on this issue because the situation is exactly the same as
for the conditions related to prudence and knowledge. If the appraiser wants to
use data from sales of comparable properties, it is necessary to form an opinion
about the situations of the buyers and sellers, even if no reference is made to the
willingness of buyers and sellers in the definition of market value. In reality, the
appraiser can be expected to start from the experience that most sellers and
buyers are willing (given the explanations in the commentary) and then
checking what looks like odd cases. The important point is that this has to be
done even if no conditions about willing buyers and sellers are part of the
definition. The criteria of measurability are therefore not a good argument for
preferring a Ratcliff type of definition compared to a TIAVSC-type of definition.

The relevance of the definition

Suppose we exclude conditions about the willingness of buyers and sellers and
just define the market value in terms of the price that can be expected if the
property is put on the market and marketed in proper ways. There might exist
situations where the relevance of such a definition would be questioned,
because in some situations few actors are interested in selling their property at
the market value, so defined. Suppose we look at the situation just after a crash
on the property market. For reasons discussed in more detail in Lind and
Persson (1997), e.g. uncertainty and credit squeeze, it might be the case that a
property fetches a low price in this situation, even though it is sold with the
usual amount of marketing. It might be the case that every sale just after a crash
is a forced sale in the sense that these property owners only sell because they
have financial difficulties (notice that this is not a forced sale according to the
definition). Many actors on the market might in this case find market value, in
the sense of the probable price given normal marketing, rather uninteresting.
Most owners would not dream of selling at that price, and potential buyers
know that very few properties would be for sale at the current market price.
I think that this argument basically is correct, but it does not imply that we
should include special conditions about willingness in the definition of market
value. Instead we should accept that there are situations where market value
might be less relevant, e.g. just after a crash on the market. This is reflected in
rising interest in concepts like “long run market value”, or market value
conditioned on a hypothetical situation (Lind and Persson, 1997), in that situation.

Conclusions
There are strong reasons for not including conditions about willingness of
buyers and sellers in the definition of market value. Given the explanation in the
commentary to the TIAVSC/RICS definition, the addition of these conditions The definition of
does not add any content compared to a definition that basically says that market value
market value is the expected price given proper marketing.
If we formulate stricter criteria for willingness – formulations like “willing to
sell at a reasonable price” – there would be problems of measurability (can
appraisers agree about what is a reasonable price?) and problems of relevance
(the actors on the real market might not be “willing” in the more strictly defined 169
sense).

3.3 Most probable price

Let us first put aside the issue of probable price versus best price. Obviously, the
sellers try to get as high price as possible, e.g. by choosing the best marketing
and sales strategy. When we talk about probable price we really mean, the
probable price given that the sellers try to get the best price possible. In the
following we will therefore only talk about the probable price.
The TIAVSC/RICS definition refers to “the estimated amount for which an
asset could exchange” while Ratcliff refers to “the most probable price”. Let us
start by assuming that these formulations really mean the same thing and focus
on the second of these formulations.
One problem with using the concept “most probable price” is that it can be
given somewhat different statistical interpretations. Is the most probable price
related to the average observed price (the expected value of the price), the
median price or the price that is most common? If the distribution of prices is
normal, all these three interpretations of most probable are identical. In most
cases there will, however, be a difference between the average and the median
price. The problem of choosing the right statistical interpretation will not be
discussed further here, and we will identify the most probable price with the
expected value of the price in the statistical sense[14].
Controversies about the meaning of probable are not only statistical. If we
look at a classical philosophical presentation of different interpretations of
probability (Salmon, 1966) we find two different interpretations that seem
especially interesting from the perspective of real estate appraisal.
According to what Salmon (1966, p. 68) calls the Logical interpretation of
probability:
probability measures the degree of confidence that would be rationally justified by available
evidence… Probability is regarded as an objective logical relation between statements that
formulate evidence and other statements – hypotheses – whose truth and falsity is not fully
determined by the evidence.
The other interesting alternative is the Frequency interpretation (Salmon, 1966,
p. 83):
According to a leading version of the frequency interpretation, probability is defined in terms
of the limit of the relative frequency of the occurrence of an attribute in an infinite sequence of
events.
JPVI Probability as frequency
16,2 If we apply the frequency interpretations to real estate appraisal we would ask:
assuming that this property was sold a large number of times in the same
circumstances as the present, what would be the relative frequency of prices in
different intervals? Given knowledge of this probability distribution we could
calculate the expected price.
170 If we look at single-family houses of standard design, it can be possible to
apply this definition, even though we have to do it roughly and approximately.
We start with a considerable number of observed recent sales, and look on these
as a random sample of observations. Then we could test various hypotheses
about the true probability distribution against these observations. From the
most probable probability distribution we then calculate the expected price and
arrive at an estimate of market value.
The other extreme situation in real estate appraisal is the valuation of a large
commercial property built for a special purpose, e.g. a hotel, on a rather small
market. In this case we have a very small number of observed prices to use as
evidence. If we define probability in terms of relative frequencies, we can
compare this situation to a case where we want to judge the probability of
getting a six on an unknown six-sided dice and where we know that the
numbers two and three showed up on the first two throws. These observations
are consistent with any probability of getting a six between zero (if there are no
sixes on the dice) and 0.67 (if there are sixes on all four unknown sides) and we
have no evidence for any of these competing hypotheses.
In situations where we have very few observations of similar cases, the
valuer seems to have two choices. The first is to say that it is impossible to
really say anything about the value – the relative frequency of different prices is
impossible to know. The appraiser can at most present a very wide interval. The
second alternative is to reject the frequency interpretation of probability.
Instead we would turn to what Salmon calls the logical interpretation of
probability.

Probability as degree of confidence

According to the logical interpretation, probability is the degree of confidence
that is rationally justified given the evidence. The evidence that the valuer uses
can then be, for example,
• observed prices, gross income multipliers, net income multipliers for
more or less similar objects;
• costs of producing different types of properties;
• expected cash-flow from owning the property, or what a person might
save in rents by owning the property;
• serious bids for the property;
• the bargaining position of buyers and seller, based on an analysis of
what alternatives the parties have.
If we look at how professional appraisers actually value “unique” commercial The definition of
properties, they seem to simultaneously use different types of evidence, like the market value
ones mentioned above. Therefore, it would seem natural to interpret probability
in these cases as a rationally justified degree of confidence. The probability of a
price in a certain interval is then the same as the degree of confidence that the
expert appraiser has in a statement that the price is in this interval.
The degree of confidence that the expert has in a price in the interval [P1,P2] 171
could in principle be found out by giving the expert a choice between the
following alternatives:
(1) You get the amount A, if the observed price is in the interval [P1-P2].
(2) You get the amount A ,with probability p.
The p for which the expert is indifferent between these alternatives is the
expert’s degree of belief in a price in the interval [P1-P2].
So far, the conclusion seems to be that the logical interpretation of
probability is the most relevant one in valuation contexts.
The main problem with the logical interpretation is, as Salmon points out, the
estimation of probabilities. Does the definition fulfil the condition of measurability?
Suppose two experts, given the same evidence, assign very different probabilities
to a certain price interval. What then is the true probability?
When we draw conclusions from evidence we use theories. In many economic
areas there are controversies about theories, e.g. whether there are any regular real
estate cycles or whether fluctuations on the market are random. Whether it is
legitimate to draw a certain conclusion in a specific situation might depend on
which of a number of competing theories is (approximately) true. If we turn to the
philosophy of science, the general view seems to be that we cannot assign objective
probabilities to theories. This is especially clear in the philosophy of Karl Popper
where theories are “bold conjectures”, so far not refuted by observations. If we
cannot assign probabilities to theories, it is easy to imagine situations where
expert X uses one theory and expert Y uses another theory, and where we cannot
say that one of the experts’ theories are better or more rational to believe in[15].
One way out of these difficulties is to say that the rationally justified degree
of belief is the probability that expert X and expert Y would assert together if
they were locked up in a jury room and not let out until they agreed! Even
though this is not possible to carry out in practice, it points in an interesting
direction: rational degree of belief as the result of a serious dialogue of experts,
or what an expert judge would say after listening to the evidence from a series
of experts. The result from that type of process seems to be as close as one could
get to an “objective” judgement of probability, if probability is defined as the
degree of confidence that is rationally justified[16].

Frequencies as evidence: a common definition of probability in appraisal contexts

It is somewhat unsatisfactory to use different interpretations of probability in
different types of appraisal – a frequency interpretation of probability in
relation to ordinary single-family houses, and the logical interpretation in
JPVI relation to more unique objects. One way to avoid this is to use the logical
16,2 interpretation as the basic definition, but view observations about frequencies
of different prices as the most important type of evidence[17].
The result would then be that we start by defining the probability of a price
(in a certain interval) as the degree of confidence in such a price that would be
rationally justified by available evidence. Among the available evidence
172 observed prices for similar properties are given special weight.
As we cannot know what really is rationally justified, we use the confidence of
experts as evidence for what would be rationally justified confidence. Thus,
probability is not defined in relation to the confidence of experts, but the confidence
of experts is used as evidence for what it is rational to believe. The burden of proof
is however put on those who question the experts! If we have no reason to believe
otherwise the confidence of experts is the confidence that is rationally justified.
If we interpret “most probable price” in this way, we then seem to have a
definition of “most probable” that fulfils all the three criteria that were
formulated in section 2: the meaning is relatively clear (given by the logical
interpretation of probability), market value is measurable (as rational belief is
related to the confidence of experts) and should be of interest to most actors on
the market most of the time.

4. Conclusions
In section 2 we discussed three criteria for a good definition of market value:
• The definition should be clear.
• In many cases, it should be possible to know the market value with a
reasonable degree of certainty.
• The market value should be relevant for most actors on the market most
of the time.
Final, the definition shall not include redundant components that make no
addition to the content of the definition (Occam’s razor).
Given these criteria we analysed three important components of a definition
of market value and concluded that:
• The definition should not include references to the prudence and
knowledge of buyers and sellers, primarily because this leads to a definition
with questionable relevance for a market with very heterogeneous agents.
• The definition should not include a reference to willing buyer and willing
seller, primarily because these terms are redundant given the condition
of proper marketing.
• The reference to expected price or most probable price in the definition of
market value, should be interpreted in terms of rational degree of
confidence in a price in a certain interval and not in terms of relative
frequencies.
Finally, we must accept that there are situations when the concept of market The definition of
value is difficult to apply. For more unique and complex objects on thin markets, market value
the evidence might be so weak and the implications of competing theories so
different, that an expert might not even be prepared to make a statement about
the market value. The role of the expert is then to make a systematic
presentation of the evidence and let the actors on the market draw conclusions
about what to do – given that the market value is impossible to know. 173

Notes
1. See for example Ratcliff (1965) and Jaffe and Lusht (1985).
2. This is also true for articles like Horsley (1992), Shlaes (1993), and Whipple (1994)
3. As will be seen, this is a small exaggeration. The criteria of measurability means that
when we judge a definition, we have to discuss if there exists some method to find out what
the value would be, given that specific definition.
4. The theory of meaning has become a very important and controversial area in modern
philosophy.
5. Some mistakes are of course allowed as there might be cases that are difficult to classify.
6. It should be noted that there are considerable differences between dictionaries in the exact
definition of prudent.
7. The traditional philosophical strategy, when people cannot agree about how to make a
certain concept more precise, is to introduce several concepts. We can talk about a person
being prudent1 if a certain set of criteria is fulfilled and prudent2 if a different, and perhaps
more stringent set of criteria is fulfilled.
8. An example of using relevance as a criteria can be found in The Mallinson Report (1994).
He presents the following argument for introducing a specific concept: “Many clients want
an estimate of the price at which a property might actually be bought or sold” (p. 25).
9. Another way of putting this is to say that people are willing to pay to find out what the
market value is, implying that it is possible to make a living helping people to find out
what the market value is!
10. This definition is very similar to the classical RICS definition (RICS, 1995), with the
exception that RICS does not include any reference to willing buyers.
11. See for example Ratcliff (1965) and Whipple (1994).
12. Another situation where market value defined in relation to the actual market might be of
less importance is appraisal for balance-sheet purposes just after a crash on the real estate
market: see Lind and Persson (1997).
13. Sometimes this is called a “normative” definition of market value – related to what the
value “should” be (see Jaffe and Lusht, 1985). Such a normative interpretation of a
hypothetical market value is, however, not necessary.
14. Discussion of this issue can be found in Jaffe and Lusht (1985, chapter 7). They reach the
conclusion that probable price should be identified with expected price in the statistical sense.
15. A classic anthology about problems of theory-choice in science is Lakatos and Musgrave
(1970).
16. On a deeper level there are of course problems of deciding who is expert or not, and the fact
that there might be situations where “experts” are not treating all theories fairly.
17. Jaffe and Lusht (1985) even go so far as to include reference to the use of comparable sales
in the definition of market value that they prefer.
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(Hans Lind is an Associate Professor in the Division of Building and Real Estate Economics,
Royal Institute of Technology, Stockholm, Sweden.)