The uncertainty of valuation

Abstract

Valuation is often said to be “an art not a science” but this relates to the techniques employed to calculate value not to the underlying concept itself. Valuation is the process of estimating price in the market place. Yet, such an estimation will be affected by uncertainties. These input uncertainties will translate into an uncertainty with the output figure, the valuation. The degree of the uncertainties will vary according to the level of market activity; the more active a market, the more credence will be given to the input information. In the UK at the moment the Royal Institution of Chartered Surveyors (RICS) is considering ways in which the uncertainty of the valuation can be conveyed to the use of the valuation, but as yet no definitive view has been taken apart from a single Guidance Note (GN5). One of the major problems is that valuation models (in the UK) are based on comparable information and rely on single inputs. They are not probability‐based, yet uncertainty is probability driven. This paper discusses the issues underlying uncertainty in valuations and suggests a probability‐based model (using Crystal Ball ) to address the shortcomings of the current model.