RICS FOUNDATION RESEARCH REVIEW SERIES AUGUST 2002

BEHAVIOURAL RESEARCH IN APPRAISAL and some perspectives on implications for practice

Julian Diaz III Georgia State University Department of Real Estate P O Box 4020 Atlanta, GA 30302-4020, USA T: 404-651-4617 F: 404-651-3396 E: jdiaz@gsu.edu

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BEHAVIOURAL RESEARCH IN APPRAISAL

Introduction: A new approach to property research

How can property scholarship serve property practice? Certainly a primary reason that a real property academic discipline exists is to generate research that can be put into practice. The practicing valuer, wishing to harvest the benefits of academic effort, typically finds an array of literature dedicated to the techniques and methods a valuer ought to employ to properly value real estate. This prescriptive research usually has little basis in how valuers actually do value property. A recent behavioural approach to valuation research begins with the simple argument that before valuation improvement can be engineered, valuation behaviour must be understood. The aim of behavioural studies into valuation therefore is to understand actual valuer problem solving (descriptive research) and thereby provide a solid basis for offering the community of practicing valuers methods of improvement. This paper reviews the findings of important behavioural research into appraisal by organizing them into the following themes: overall methods of valuation comparable sales selection biases and heuristics feedback and client influences To offer some insight and perspective, opinions from US valuers about the relevance of this research to practice are also reported. These opinions are not intended to represent the only nor the most important views on relevance, but given the increasingly global perspectives of property market analysts, all readers should find them stimulating. In the next section, the review begins by introducing the history and methods of behavioural property research. Psychological foundations are acknowledged, but no attempt to exhaustively review the literature from cognitive psychology is made.

Roots and Methods A Nobel Prize winning economist, Herbert Simon, and his colleague, Alan Newell, pioneered an approach to studying human problem solving that fellow economists called behaviouralism.1 While this work laid the foundations for the field of artificial intelligence, it is also the ancestor of real property behaviouralism. Newell and Simon viewed the human mind as a serial information processor that, because of limited capacities, must seek efficiency when solving problems (Newell and Simon 1972). This search for efficiency leads to the use of cognitive short cuts called heuristics. The use of these short cuts can in turn cause errors and biases in judgment. The pioneering work on the use of cognitive short cuts was performed by Amos Tversky and Daniel Kahneman who identified three heuristics that they felt humans routinely used when making judgments (Tversky and Kahneman 1974). For example, people often estimate the frequency or likelihood of an event, for instance the probability of a tenant bankruptcy, by considering how many similar instances can be recalled. The use of this availability heuristic is influenced by the ease of recall. When actual probabilities are not correlated with the ease of recall, bias can occur. The representativeness heuristic is a form of stereotyping used for classification. An event, object, or idea is placed into a category based on the similarity of its characteristics to the stereotyped qualities of the group. A valuer might use this heuristic when selecting comparable sales. Bias can result when unimportant characteristics are used for classification or important ones are ignored. Numerical estimates can be made with the anchoring and adjustment heuristic. An initial reference point serves as a starting point and is adjusted as further evidence is considered. Inappropriate reference points, such as the value opinions of clients, and inadequate adjustments can be sources of bias.

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About a decade ago, property research using the behavioural perspective began to appear in academic journals. Most of this early work focused on valuers, and interest in valuer behaviour still dominates this literature. Behavioural researchers primarily use three methods to generate data for their studies. They are field surveys, process tracing methods, and controlled experiments. The field survey is used to reveal attitudes and opinions. Results frequently serve to guide more structured, followup research. The intensive interview is a variation of the field survey, and it too has yielded important findings. Process tracing methods capture the actual processes used by valuers. In a typical study, valuers are asked to estimate the value of a hypothetical property. They must ask for available information as needed. A valuers cognitive processes are traced by carefully recording the sequence of requested and utilized information. Controlled experiments are powerful tools for collecting evidence about relationships between variables. They let researchers isolate the impact that key variables, for example knowledge about the subject sale price, have on valuer behaviour. These techniques have allowed researchers to study how valuers actually do their work.

Consideration of these general influences is followed by a further narrowing of focus to the details of the subject. Here the US appraisal process calls for collection of information about the subject plot, building, title, property taxes, and planning permissions (called zoning). Next come a determination of the highest and best use and a collection of the comparable data that will support the valuation. These data should include comparable sales data, comparable rent data, and comparable cost data. At this point, according to training, the appraiser should use all three approaches to value, sales comparison, cost, and income, or explain why an approach was not used. Since the process yields three different estimates of the property value, a final reconciliation is needed to derive a conclusive single-point value estimate. The reporting requirements for US appraisers are quite extensive. They must disclose and document the factors, data, logic, and processes used to derive the value estimate. These disclosure requirements reflect the requirements of the appraisal process that is portrayed in figure 1.

FIGURE 1 WHAT US EXPERTS ARE TAUGHT TO DO

Overall methods of valuation

PROBLEM DEFINITION
What US Appraisers Are Trained to Do In the United States, valuers, more commonly called appraisers, are trained to value property using a step-bystep method called the appraisal process.2 After defining the appraisal problem by identifying the location of the property, the pertinent property rights, the date of valuation, the valuation basis, and the appropriate definition of value to be estimated, the appraiser is taught to consider general forces which may influence the property value. Depending on the property, these general forces could include international, national, regional, county, city, and neighborhood factors. Because the US appraiser is taught to start at the broadest possible class of influences and work through to the most narrow, the process is essentially deductive.

GENERAL DATA

SUBJECT PROPERTY DATA

COMPARABLE DATA

VALUATION ANALYSIS

RECONCILIATION

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BEHAVIOURAL RESEARCH IN APPRAISAL

What US Appraisers Actually Do The appraisal process, called the normative model because appraisers are taught it as the norm for appraisal practice, requires significant effort to perform. Based on the work of Newell and Simon as well as Tversky and Kahneman, researchers suspected that US appraisers might not invest the cognitive effort needed to perform the demanding normative appraisal process, but that they would find, probably subconsciously, short cuts. Determining what US appraisers actually do in contrast to the normative appraisal process was the focus of a series of process tracing experiments that initiated the behavioural approach to property research (Diaz 1990a). This initial study concluded that residential US appraisers actually use the six-step process depicted in figure 2. These ordered steps are problem definition, specific data collection, general data collection (optional), comparable data gathering, valuation analysis, and final judgment. This actual or descriptive process is not the same as the normative appraisal process, but it is related. It is a step-bystep, serial process with no iterative backtracking. Unlike the appraisal process, the descriptive process postpones and usually eliminates the gathering of the most general information. Whereas the appraisal process is essentially deductive, beginning with the most general data and narrowing gradually to the specifics of the subject, the actual processes of US experts are more inductive. According to the findings of this study, US residential valuation experts quickly move from the specifics of problem definition to the specifics of the subject property and only broaden their focus when questions call for a more general investigation. General data collection is often completely skipped. This tendency held with residential appraisal assignments in familiar as well as unfamiliar locations.

FIGURE 2 HOW US AND NZ EXPERTS VALUE A RESIDENCE

PROBLEM DEFINITION

SPECIFIC DATA COLLECTION

GENERAL DATA COLLECTION

need general data n COMPARABLE DATA GATHERING

PERFORM ANALYSIS

desire additional valuation approach n JUDGEMENT

Once specific subject data were collected, US experts participating in the experiments generally began to collect comparable data. Usually they gathered all the data necessary to conduct the valuation analysis before proceeding into the analysis. For the routine residential valuations represented in the experiments, US experts always employed the sales comparison technique. A minority of experts in the study also employed at least one of the other techniques, either the cost or income approaches. A few experts would perform an analysis using one valuation technique, decide to employ another technique and recycle into the data-gathering phase before performing the additional analysis, but this was unusual behaviour. Among subjects who employed multiple techniques, most proceeded in a strict serial manner gathering all the data needed for multiple techniques before entering the analysis phase.

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More recent research extended the process tracing approach of determining actual valuation processes into New Zealand and the United Kingdom.3 NZ valuers tended to follow the same actual procedures as the US appraisers (figure 2) but some differences were found. Compared to NZ expert valuers, US experts generally eliminated more normative steps. NZ experts always valued the land separately from the buildings. US experts rarely did this. NZ experts more often considered general location factors than US experts did, but they almost always considered general data only after considering specific data. These differences between US and NZ procedures lead to the general impression that valuation behaviour is similar but that US behaviour is even less US normative than NZ behaviour. While NZ expert valuation behaviour was very similar to the behaviour of US appraisers, the behaviour of the UK expert was different indeed.

FIGURE 3 HOW UK EXPERTS VALUE A RESIDENCE

PROBLEM DEFINITION

need data y

COMPARABLE DATA GATHERING

need problem refinement n ANALYSIS

y
What UK Valuers Actually Do The UK residential expert descriptive model of figure 3 is quite different from the US and NZ residential expert model. Its general character is not serial but iterative. It consists of four steps, problem definition, comparable data gathering, analysis, and final judgment, as compared to the US and NZ model of six. UK expert subjects participating in the study seemed to seek preliminary problem definition and then immediately start comparable data gathering. As questions arose, the UK experts would cycle back, seeking further problem definition. This iterative tendency held even in the analysis phase. In seeking problem definition, UK experts seemed not to distinguish between information about the assignment, the subject property, or the general market. UK residential experts employed only the sales comparison technique but sometimes used data associated with the other techniques, such as cost or income information, to refine the problem or even to use in the sales comparison approach. Moving from familiar settings to unfamiliar ones did not change UK expert behaviour. It remained essentially iterative. Iterations did seem to decrease during the comparable data-gathering phase but increase in the analysis phase for unfamiliar locations.

need problem refinement n JUDGEMENT

The reasons for the fundamental differences between residential expert processes in the UK and residential expert processes in the US and NZ are speculative, but there are several potential causes. The most obvious is probably the existence of the widely accepted normative appraisal process which all US appraisers are taught. The case is similar in NZ. US and NZ experts do not follow the normative model, but its influence is clear in the hierarchy of their distinct step-by-step procedure. US/NZ students learn the normative model, probably use it in early assignments, and then unconsciously modify this standard process in the search for greater efficiency. UK appraisers do not start with such strong normative guidance. Their training emphasizes the physical inspection rather than valuation techniques. The stricter and more elaborate reporting requirements in the US and in NZ, which tend to mimic the normative appraisal process, probably reinforce the influence of the prescribed procedures. Other factors which may influence

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these processes and contribute to their differences are business cultures and client expectations that change from country to country. Time on Task The amount of time valuers spend on residential valuation tasks was also studied experimentally (Diaz, Gallimore, and Levy 2002b). Valuers from the UK, the US, and NZ participated. These results support the notion that the US normative appraisal process is cognitively demanding and that greater departures from it result in greater reductions in effort. The processes of NZ valuers which were closest to the US appraisal process, were associated with the greatest time on task. The US processes, less normative than the NZ processes but not significantly so, resulted in less time on task compared to the NZ valuers but again not significantly so. The UK processes, significantly less normative than those of US valuers, resulted in significantly less time on task. Items of Comparability A survey conducted within the UK investigated what property characteristics residential valuers consider to be critical compared to those that motivate buyers (Adair, Berry, and McGreal 1996). The results of this study suggest that valuers and buyers do not view property value in quite the same way. While valuer participants in the survey and buyer participants in the survey agreed that distance and financial variables had a limited influence on value, other agreement was lacking. House size and condition were critical variables for buyers who generally de-emphasized environmental and neighborhood characteristics. Valuers however considered neighborhood variables as critical influences on value. If valuers judgments of what creates value do not reflect buyer motivation, then comparability is defined by an inappropriate set of variables. An inappropriate definition of comparability may lead to improper adjustments of sales or even to sales selection bias. The process of selecting comparable sales and potential sources of bias have also been studied. These investigations form the second major theme of behavioural property research. Expert Versus Novice Sales Search and Selection The comparable sales selection processes used by residential valuers in the US were described in an early behavioural study (Diaz 1990b). Two distinct approaches, one favored by experts, the other by property students, were uncovered. The expert approach was more efficient, that is, it was less cognitively demanding. Students with some property experience used mixed approaches indicating that they were shifting from novice-like behaviour to expert-like behaviour as they gained experience and sought greater efficiency. Novices tended to look at many sales, taking written notes on all the sales examined and postponing any judgments about comparability. Only after they had all the information on all the sales examined did the students begin to select the most comparable sales. Some students never made decisions about comparability but used all available sales in the valuation analysis. Others used selection strategies that focused on two or three key characteristics such as location and style of house. Compared to students, experts considered fewer candidate comparable sales. The procedures that they tended to follow were also significantly different than those used by students. Typically an expert proceeded by carefully examining the first few candidate comparable sales in search of one or two preliminary best sales. Other candidate sales were compared to these criterion sales on the basis of about two characteristics, usually location and an important physical characteristic. If a candidate sale compared favourably to the best standard, it was kept, otherwise it was rejected, and the next candidate was screened. If a more comparable sale was discovered, it became the new standard. Once a certain number of sales had been accepted as comparable, the expert terminated the search and started the valuation analysis. The number of comparable sales required to terminate the search varied among individual experts but ranged between three and six.

Comparable sales selection

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Expert comparable sales selection can be characterized as a two staged process as shown in figure 4. In the first stage, the expert engages in a cognitively demanding process of selecting one or two sales representing a standard of comparability. In the second stage, these criterion sales are used as quick screens to efficiently reduce a pool of candidate sales to a set of comparables. Screening of candidates stops when a satisfactory number of comparable sales have been selected. This strategy is efficient, but because experts may terminate search before all sales are considered, important data may be overlooked suggesting the potential for sub-optimal or even biased results.

appraisers not selecting the best comparables, but it also influenced the actual value judgment. When these experiments were repeated among British valuers the results were similar but different in some notable ways. British valuers seemed less susceptible to comparable selection bias due to transaction price knowledge than their US counterparts, but the value estimates of British valuers seemed more susceptible to transaction price knowledge than the value estimates of US appraisers. These cross-cultural differences in susceptibility to transaction price knowledge are probably due to rigid disclosure requirements which make the valuation and adjustment processes transparent. The US has strict disclosure requirements, but the UK does not.

FIGURE 4 HOW EXPERTS SELECT COMPARABLE SALES

Studies also have concluded that disclosure requirements may influence the number
POOL OF CANDIDATE SALES

SUBJECT INFORMATION

of comparable sales

SELECTION OF CRITERION SALES

SELECTION PROCESS

that valuers will develop and use in their valuations (Gallimore and

SCREEN OF REMAINING CANDIDATES

REJECT ACCEPT

SCREENING PROCESS

Wolverton 1997 and Diaz, Gallimore, and Levy 2002b). Valuers from cultures requiring disclosure, such as the United States and New Zealand, tend to use

DO WE HAVE ENOUGH SALES?

NO YES

STOP SALES SEARCH

more comparable sales in their valuation analysis than do valuers from

Bias in the Process of Selecting Sales Knowledge of the subjects pending transaction price is another factor that can bias comparable sales search results. In a series of controlled experiments, the comparable sales selected by US appraisers were influenced by knowledge of the sale price of the residence being valued (Gallimore and Wolverton 1997). Not only did this sale price knowledge result in

the UK where disclosure is uncommon. Does moving from assignments in familiar markets to those in unfamiliar markets influence the number of sales that a valuer will use in the valuation analysis? This question has also been studied but with surprising results. Perhaps valuers should increase comparable sales search when appraising properties in markets that are unfamiliar to them, but research does not find evidence that they do (Diaz,

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BEHAVIOURAL RESEARCH IN APPRAISAL

Gallimore, and Levy 2002b). Valuers from the US and the UK who participated in a series of residential valuation cases did not significantly increase the number of sales examined when moving from familiar to unfamiliar geographic setting, and New Zealand valuers significantly decreased the number of sales examined when operating with unfamiliar markets. The findings from these investigations into comparable sales selection like those from studies examining overall valuation methods are consistent with the common human need to find cognitive efficiency and reduce cognitive effort even at the risk of reducing performance quality. The cognitive short cuts commonly used by valuers and the biases these heuristics expose valuers to are the subject of another important research theme.

(Havard 1999). These students adjusted a low previous valuation upward more often than they adjusted a high previous valuation downward. In other words, they appear to have anchored on the high valuations but not on the low ones. While these experiments did not use experts, a series of experiments in the US did (Diaz 1997, Diaz and Hansz 1997). When appraising property in markets familiar to them, these US commercial valuation experts were not influenced by the previous value opinions of other, anonymous experts, but when they were valuing property in areas unfamiliar to them, they were so influenced. Market ambiguity leading to valuer uncertainty seems to be a factor that triggered the anchoring behaviour in these studies. Judging from other experimental results, US experts operating in unfamiliar markets may also anchor on other available information such as uncompleted (unclosed) contract prices on the subject and on comparable properties (Diaz and Hansz 2001). The US also provides evidence that valuers anchor to their own previous value judgments (Diaz and Wolverton 1998). In this experiment, expert income property appraisers valued a commercial property and revalued the property some months later. The results indicate that appraisers may often insufficiently update their previous value judgments, that they anchor to their previous valuations, and that they tend to make adjustments to these previous valuations which are insufficient in light of the available market evidence. Some of these anchoring results are consistent with agency-related bias. Agency-related bias might occur when valuers are motivated to meet the expectations of their clients. Some anchoring behaviour may originate from agent-client concerns which become so pervasive that they exert influence even in situations that are agentclient neutral such as the hypothetical exercises of controlled experiments. Even in these cases, anchoring may be a subconscious, learned response to general agent-client concerns rather than a subconscious, learned management of cognitive limitations. A body of research is now emerging that focuses on the response of valuers to feedback and client influences. This is the fourth and most recent theme of behavioural property research.

Biases and Heuristics

Recency and Confirmation Behaviour Investigation into heuristic problem solving and potential bias among valuers was inspired by the work of Tversky and Kahneman. The first research in this stream was conducted in the UK and involved over two hundred commercial and residential valuers in a postal survey/experiment (Gallimore 1994). The findings of this study suggested that the order in which valuers process evidence may influence their conclusions. Because valuers seemed to give greatest credence to information most recently considered, differences in information sequence, for example the order in which comparable sales are examined, may evoke different interpretations of the same set of evidence and therefore may lead to different value conclusions. This tendency has been labeled recency. Another postal survey/experiment involving a similar number of UK valuers examined confirmation behaviour (Gallimore 1996). Confirmation behaviour occurs when valuers make early, preliminary value judgments and then seek or over-weight evidence supporting these early opinions. Some evidence indicates that valuers may indeed use confirmation strategies, but the case is not proven. Anchoring Behaviour Several experiments have explored the tendency of valuers to anchor to previous value opinions. A UK study used final year valuation students from the Nottingham Trent University and Heriot-Watt University as subjects

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their role as providing an independent opinion of market

Feedback and Client Influences

Nature of Client Feedback and Pressure Surveys, experiments, and intensive interviews have all been used to study valuer response to feedback and client influences. A postal survey/experiment involving more than 500 US commercial appraisers provided the first strong formal evidence of client pressure and valuer response (Kinnard, Lenk, and Worzala 1997). Client pressure on valuers was found to be pervasive. The tendency of valuers to succumb to these pressures was also common. When pressured, valuers were influenced by the importance of the client but not by the size of the requested adjustment. The influence of clients on expert New Zealand valuers was studied in a series of intensive, in-depth interviews (Levy and Schuck 1999). Certain types of assignments, especially those valuations for negotiating settlements, seem to be associated particularly with client pressure. The types of client pressure exerted on valuers were found to be a function of client sophistication. Sophisticated clients use information to influence valuers. Methods include emphasizing positive property attributes, withholding negative information, and supplying selected market information. Unsophisticated clients tend toward coercive tactics such as threatening to withhold fee payments or future assignments. Participating New Zealand valuers indicated that for any given property there is a range of defensible values and that modification of reported values within this range was acceptable practice but that changing values beyond this range was not acceptable. This type of unacceptable behaviour appeared to be associated with smaller valuation companies often under financial hardship serving unsophisticated clients. Impact of Client Feedback and Pressure The impact of client pressure can be more subtle than direct influence on reported values. A survey conducted in the US revealed that appraisers exposed to above average levels of client feedback tend to define the valuation objective differently than do other appraisers (Wolverton and Gallimore 1999). Most appraisers view

value, but those exposed to the greatest amount of client pressure may tend to see their role as validating a pending sale price. A similar survey of UK valuers yielded quite different results (Gallimore and Wolverton 2000). While a significant minority of UK valuers appeared to view the valuation objective as sale price validation, these valuers are not subjected to greater client pressure than those valuers who defined their task as objective market value estimation. These valuation-asvalidation valuers do however tend to be specialists who work exclusively or nearly so as residential valuation experts providing few if any other professional property services. To determine just why this relationship exists will require further investigation. A study conducted in the US suggests that client concerns may impact value judgments in pervasive as well as subtle ways (Hansz and Diaz 2001). The focus of the investigation was the role of transaction price feedback. In a series of experiments, expert appraisers valued a hypothetical property. After documenting their value judgment, they were presented with the subject sales contract indicating the pending transaction price. Next they valued a second, completely unrelated property. Those appraisers receiving transaction price feedback indicating that they had been low in their first valuation adjusted upwards their subsequent value judgment on a totally unrelated property. Appraisers who received feedback that they had been too high in their first value judgment did not make significant adjustments to subsequent value judgments on a totally unrelated property. Why did these experts give greater weight to the too low feedback than to the too high feedback? If they had been motivated by a general desire to improve performance, they probably would have reacted similarly to both types of feedback, but they did not. They reacted much more strongly to the too low feedback despite the fact that there was no client pressure in the experiments. Of course appraisers know that a valuation that is too low, unlike one that is too high, will likely be of great concern to clients. The conclusion is tempting that appraisers subconsciously react more strongly to too low evidence than to too high evidence because of their pervasive concern over client reactions.

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BEHAVIOURAL RESEARCH IN APPRAISAL

By post, each of these 172 individuals was sent a cover

Summary of findings
Research into valuer behaviour thus far supports a broader view of human problem solving and judgment. Valuers, as all humans, are problem solvers seeking task efficiency and pursuing simplifying short cuts to overcome innate information processing limitations. The use of these efficient processes can become routinized and their automatic employment may lead to biases. To some extent, the process of becoming a valuation expert, appears to be the process of learning and routinizing these efficient behaviours. The routinized behaviour of experts is not only efficient, it is also difficult to alter even when performance (for example, valuation accuracy) is threatened. The widely held belief that valuers face significant and varied client pressure seems confirmed. Some of the research supports the view that some heuristic behaviour may be the unconscious, routinized response to these pervasive client concerns. The architecture of the human mind is a powerful constant that homogenizes valuer behaviour. Nonetheless notable differences between UK valuer behaviour and US appraiser behaviour suggest that cultural and educational variables exert significant impacts in shaping the behaviour of valuation experts. Cultural and educational differences should be considered therefore before generalizing results and drawing conclusions about the implications for the professional practice of valuation. Implications for Practice To help understand the implications of behavioural findings to valuation practice, a survey was conducted of thought-leaders within the US appraisal industry. The individuals participating in the survey were professionally accredited by the prestigious Appraisal Institute (e.g., with the MAI or SRA designation) and had held or were still holding prominent leadership positions within the organization. From membership directories of the Appraisal Institute, the names and addresses of all local chapter presidents and of all members of certain important national committees (Executive Committee, National Committee of Regional Chairs, Educational Programs and Publications Committee, Body of Knowledge Committee, Education Programs Committee, Curriculum Subcommittee) were obtained.
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letter introducing the project and inviting participation. Included was a four-page survey that summarized the critical findings of 14 published behavioural studies. After each summary, two questions were asked, and space was provided for answers. The questions were How is this finding relevant to the practice of real property valuation? and How can this finding be applied to help valuers and the real property valuation profession?. The last page of the survey asked for Overall comments on the relevance of this research to the practice of real estate appraisal, Overall comments on how this research can be applied to help appraisers and the appraisal profession and Other comments. To encourage participation, anonymity was guaranteed and a copy of the resulting paper was offered. Ten of the posted surveys were returned as not deliverable. Seventeen usable responses were eventually received. Because of the amount of time needed to respond to the open-ended survey, the response rate is understandable. More importantly, the rate is acceptable since the purpose of the survey was to report the opinions of those experts responding but not to represent their opinions as generally those of any larger group. Overall most participating valuers felt that the research was very relevant to valuation practice and revealed systematic problems, such as potential problem solving biases and outside influences, which are commonly faced by them and which threaten their optimal performance. Many of the valuers indicated that they were personally or anecdotally aware of these problems. Most saw education as a powerful weapon arguing that valuers need to understand potential biases and influences and should be taught skills to confront and manage them. Some suggested that the realities of the problems confronting valuers should be more deeply reflected in the ethical standards, rules, and enforcement policies of the profession. Experts, several valuers felt, should participate more actively in the formal training of novices so that efficient processes as well as cautions in using them can be effectively passed on. Valuers who felt that the public should be aware of the independent nature of the valuers task saw a role for the industrys professional

organizations in promoting this view and in supporting a system that rewards competency and honesty. Beyond these general recommendations, many suggestions relating to specific research findings were also made. Overall Methods of Valuation The reaction of most of the consulted valuers to this stream of research was that the appraisal process found in textbooks and taught to students needs to be examined. Are market demands forcing valuers to develop efficient processes that can lead to valuation errors? If these efficient processes are dangerous, then the existing appraisal process as currently taught needs to be reinforced. The roles of education, ethics, and policing become critical in helping valuers maintain appropriate procedures. If, conversely, the efficient processes followed by valuers do not increase the likelihood of systematic errors, then the appraisal process taught to students can be revised to reflect the efficient processes that experience has taught expert residential valuers to follow. In this case, experts should become more active in the formal education of student valuers. While valuers recognize that the question of the appropriateness of actual valuer processes must be answered with further research, the majority opinion was that departing from the formal model was dangerous. Several valuers expressed the fear that the elimination of some prescribed steps is very tempting given client and market demands but that this elimination can lead to oversights such as failing to see price trends. Streamlining of the appraisal process may be driven by clients and their short-term needs, but it may cause valuers and their clients long-term problems. The research finding that valuers and buyers may not agree on what creates property value drew comment. Some valuers considered this a wake-up call to view actions of buyers and sellers with greater concern and consideration pointing out that valuers cannot disconnect from the market that they are analyzing. Valuers should mirror, they said, the market and resist over-interpreting it. Buyer/seller responses to characteristics must be studied so that markets and their participants can be understood. One respondent speculated that an educational process

that emphasizes building inspections over market analysis might contribute to the problem. Valuers should focus on both subject property characteristics and the market reaction to them. Finally one valuer suggested that modern regression techniques might help valuers to judge the market reaction to property and neighborhood characteristics that contribute to value. Comparable Sales Selection As with the issue of overall methods of valuation, valuers were concerned with the question of the tradeoff of accuracy for efficiency when considering the sales selection processes of experts versus students. Which approach is better, they asked. Their concern was that the expert approach was clearly faster, but it could lead to the omission of important data. The student approach may lead to a deeper understanding of the market, especially when employed by experts, but might overwhelm novices and lead to poor decisions. Again some called for more research examining the strengths and weaknesses of the different approaches. One valuer expressed the opinion that the efficient sales selection process was probably appropriate when valuers are operating in familiar markets, but that they should use the novice approach when first learning a market or when operating in unfamiliar markets. Most valuers believed that searching for comparable sales by price rather than by comparable characteristics was a short cut that could lead to problems. Some were absolutely against the practice pointing out that valuers who search by price can lose sight of the market and inadvertently introduce bias into their analysis. These valuers tended to question the policy of providing pending sale price information to valuers. Others saw using the natural correlation between price and value as a useful method of reducing the pool of candidate comparables but acknowledged that the practice could lead to poor valuation conclusions. One valuer recommended introducing pending transaction price information only after the comparable sales have been selected by other criteria. Valuers generally agreed that the pending subject sale price was only one piece of relevant information and that the conditions of the sale should be carefully considered.

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Biases and Heuristics Responding valuers saw recency as a natural and understandable behaviour, but one that nonetheless could cause valuation problems. Their recommendation was to educate valuers to be aware of the tendency to give more weight to most recently encountered data and to train them to constantly review earlier comparables and to compare them with the more recently acquired data to insure that the best information remains in the process. The possibility of premature conclusions and the existence of confirmation behaviour were more troubling to the consulted valuers. Some suspected that the problem might be common among valuers and market researchers. They speculated that once valuers form an opinion of a market, they more heavily weight evidence that supports that opinion than evidence that disputes it. Most valuers agreed that education was a strong weapon against these natural but potentially biasing behaviours with some recommending that cautions against the behaviours be included in formal valuation standards. The finding that anchoring behaviour is related to valuations in unfamiliar markets led many valuers to wonder if assignments should be accepted in unfamiliar markets or if valuers should be required to disclose market unfamiliarity before accepting assignments. Others suggested requiring final report disclosure of the efforts made by valuers to familiarize themselves with markets and the people consulted to gain this market competency. The major recommendation was that valuers need to be more cautious and need to spend more time and expend greater effort in learning markets that are foreign to them. Local experts were seen as important resources whose opinions should be solicited but supported by actual data. Disclosure, education, and application of competency provisions in professional standards were all seen as useful ways to combat the potential dangers of working in unfamiliar markets. The strong anchoring influence of uncompleted contracts on appraisal judgment stimulated comment from valuers. All agreed that these pending sales were important market data capable of revealing market trends, but many valuers cautioned that uncompleted deals should be audited carefully because they can be misleading. Parties

to these transactions should be interviewed to determine such critical issues as motivation, relationship between parties, terms, and exposure on the market. One valuer said that the analysis of pending transactions was so important that it should be part of novice training. Another felt that, particularly in active markets, pending transactions may reflect trends better than historic transactions and thus should enjoy prominence in the valuation process. Evidence that valuers may anchor to their own previous value estimates prompted discussion about the nature of updates. Valuers stated that updates were troublesome for several reasons. For example the valuer is typically under pressure to justify the original value judgment, and clients are reluctant to pay a sufficient fee to perform a proper update. Some valuers acknowledged that they often feel a vested interest in their previous judgments. Valuers also are aware that a significant change in a value estimate might erode client confidence even if market conditions justify the change. Updates may therefore exacerbate the tendency to engage in confirmation behaviour, what one valuer called cherry-picking data to support an old opinion. Because of these problems, several valuers felt that clients are better served by using a different valuer for updates. Despite some general misgivings about performing updates, valuers advised treating an update like a new appraisal and being careful not to short cut the valuation process. One valuer recommended that valuers divorce themselves from the old number, that they start collecting and analyzing all current data afresh and only consider the previous judgment after the new judgment is made. Feedback and Client Influences Responding valuers pointed out that interaction with clients is an important part of the process of valuing property. Valuers get important information about the subject property and the market by communicating with their clients. Nevertheless a common concern was that these communications can subtly cross over into attempts to influence and are therefore potentially dangerous. Succumbing to such pressure is not only unethical, but as several valuers made clear, it destroys the integrity of valuers and their product, threatens the relevance and

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therefore viability of their profession, and may even endanger the economy. Many of the valuers said that the problem was everywhere and should be countered with education and ethical enforcement. There is a need, valuers argued, for educational guidance as to how to appropriately communicate with clients, how to ethically meet their needs, and how to recognize and resist their inappropriate pressures and influences. Where unethical advocacy is clear, serious sanctions need to be enforced, they said. Some client pressure is inadvertent, according to some valuers, and therefore clients should also be made aware that valuers must maintain independence and objectivity. One valuer ventured that in some cases, transaction price validation may be an appropriate client need and therefore an appropriate valuer goal. Such a validation can be conducted independently and objectively and could reduce client-valuer confusion about the role of the valuer and therefore also reduce inadvertent pressure and the taint of inappropriate advocacy. Evidence that valuers respond differently to feedback that they have been too low in the past than to feedback that they have been too high also raised comment. Various explanations for the finding were offered. Valuers may develop a fear of being too conservative and may subconsciously respond to being rewarded for being aggressive in their interpretation of the market. Over time, this may develop a bias toward the high side. Valuers may be loath to disclose bad news. They may have a natural tendency to assume that the market will continue upward but not downward. Awareness of the potential bias toward too low feedback should help combat it, some valuers thought. Getting back to valuation basics was also recommended. As one valuer said, valuers need to consider all the evidence, including feedback, and consciously decide its relevance to the current and future assignments. The role of the academic community to inform the profession remains. Many questions still exist that should be addressed. This paper has revealed several. Do valuers engage in subconscious confirmation behaviour? What is the role of cultural and educational variables in shaping valuer behaviour from one country to another? What lessons can valuers in each country learn from the processes of experts in other countries? Do the actual, efficient processes of experts promote more valuation error than the processes that they are taught? Are novice comparable sales selection processes less dangerous than the more efficient expert ones? And there are many others.

Conclusions
Behavioural research in valuation has revealed that valuers, like all human problem solvers, have a need for cognitive efficiency to overcome natural processing limitations. Some of the short cuts that valuers subconsciously develop and use are positive, providing efficiency and enhancing performance. Other short cuts are dangerous and may reduce performance. Current expert practices that are positive need to be promoted especially to novices who typically learn these practices only gradually. There is a role here for experts to participate in the formal education of novices. Where current practices are dangerous, experts themselves can benefit greatly from education. The role of professional organizations is to inform and educate their members about both the worthwhile expert processes and the dangerous ones. Education may also help valuers combat the pressures that confront them, but there may be a need to revisit professional standards in light of new evidence about the impact of client and market pressures on subconscious valuer behaviour. Certainly rules of ethical conduct should be developed and enforced, but probably more important will be the support the professional organizations offer their members in recognizing and resisting inappropriate influences.

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Most of the discussed research is published in academic journals. Two British journals, the Journal of Property Investment and Finance (previously called the Journal of Property Valuation and Investment) and the Journal of Property Research have published much of the behavioural research. The American journals that have published behavioural research are The Appraisal Journal, The Journal of Real Estate Research, and Real Estate Economics. These publications, especially those from the UK, are often found in the libraries of British universities with property departments. Academic property departments can be very helpful in locating specific papers. As a further aid, the following bibliography is offered. Adair A, Berry J and McGreal S (1996) Valuation of Residential Property: Analysis of Participant Behaviour, Journal of Property Valuation and Investment 14(1): 20-35 Diaz J III (1990a) How Appraisers Do Their Work: A Test of the Appraisal Process and the Development of a Descriptive Model, The Journal of Real Estate Research 5(1): 1-15 Diaz J III (1990b) The Process of Selecting Comparable Sales, The Appraisal Journal 58(4): 533-540 Diaz J III (1997) An Investigation into the Impact of Previous Expert Value Estimates on Appraisal Judgment, Journal of Real Estate Research 13(1): 57-66 Diaz J III, Gallimore P and Levy D (2002a) Residential Valuation Behaviour in the United States, the United Kingdom, and New Zealand. Journal of Property Research, forthcoming Diaz J III, Gallimore P and Levy D (2002b) Multicultural Examination of Valuation Behaviour. Journal of Property Investment and Finance, forthcoming Diaz J III and Hansz J A (1997) How Valuers Use the Value Opinions of Others, Journal of Property Valuation and Investment 15(3): 256-260 Diaz J III and Hansz J A (2001) The Use of Reference Points in Valuation Judgment, Journal of Property Research 18(2): 141-148 Bloom G F and Harrison H S (1978) Appraising the Single Family Residence. American Institute of Real Estate Appraisers: Chicago Appraisal Institute (1996) The Appraisal of Real Estate 11th ed., Appraisal Institute: Chicago

Bibliography

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Diaz J III and Wolverton M L (1998) A Longitudinal Examination of the Appraisal Smoothing Hypothesis, Real Estate Economics 26(2): 349-358 Gallimore P (1994) Aspects of Information Processing in Valuation Judgment and Choice, Journal of Property Research 11(2): 97-110 Gallimore P (1996) Confirmation Bias in the Valuation Process: A Test for Corroborating Evidence, Journal of Property Research 13(4): 261-273 Gallimore P and Wolverton M L (1997) Price-knowledgeinduced Bias: A Cross-cultural Comparison, Journal of Property Valuation and Investment 15(3): 261-273 Gallimore, P and Wolverton M L (2000) The Objective in Valuation: A Study of the Influence of Client Feedback, Journal of Property Research 17(1): 47-57

Tversky A and Kahneman D (1974) Judgement Under Uncertainty: Heuristics and Biases, Science 185(4): 11241131 Wolverton M and Gallimore P (1999) Client Feedback and the Role of the Appraiser, Journal of Real Estate Research 18(3): 415-432

Footnotes
1 Behaviouralism is sometimes confused with behaviourism which is a school of psychology, whose most famous member is perhaps B. F. Skinner, that holds that the only appropriate subject of psychological study is actual, overt behaviour and therefore not subjective consciousness. 2 See for example The Appraisal Institute (1996) or Bloom and Harrison (1978) 3 See Diaz, Gallimore, and Levy (2002a)

Hansz J A and Diaz J III (2001) Valuation Bias in Commercial Appraisal: A Transaction Price Feedback Experiment. Real Estate Economics 29(4): 553-565 Havard T (1999) Do Valuers Have a Greater Tendency to Adjust a Previous Valuation Upwards or Downwards? Journal of Property Investment and Finance 17(4): 365373 Havard T (2001) Valuation reliability and valuer behaviour. RICS Foundation Research Paper Series 4(1) Kinnard W N, Lenk M M and Worzala E M (1997) Client Pressure in the Commercial Appraisal Industry: How Prevalent Is It? Journal of Property Valuation and Investment 15(3): 233-244 Levy D and Schuck E (1999) The Influence of Clients on Valuations, Journal of Property Investment and Finance 17(4): 380-400 Newell A and Simon H (1972) Human Problem Solving, Prentice-Hall, Englewood Cliffs, N.J.

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