By Terri Lastovka, ASA, ARM, CPA, JD
with Richard J. Conti, ASA, ARM[JC1]
Abstract: Our history defines us, creating inherit bias and logical fallacies that affect decision-making, including appraisal opinions. Using definitions and examples, this article explores how two neuroscience properties of bias can affect every appraiser in ways they may have never considered.
Human brains evolved with a gland named amygdala which is responsible for the response and the memory of emotions, especially fear.[i] It has protected us from danger and threats. It is why we fear snakes, spiders, heights or public speaking. This emotional response of fear due to memory from near-lethal experiences is often referred to as unconscious bias, or implicit bias, but it is not the only type of bias that influences our lives and decisions. While implicit or unconscious bias operates outside of the person’s awareness – and can influence many areas not involved with snakes, cliffs, or presentations – people with explicit bias are aware of their biases, making them easier to guard against.[ii] Notice whether implicit or explicit bias seems to inspire the decision-making bias and logical fallacies discussed in this article.
The neurology of our brain has a sensory register process which takes at most a few seconds to decide if information from the environment is going to be stored permanently or forgotten.[i] This is why we are amazed at magic tricks, forget where we just placed our keys, and fail to recall what our spouse just said. For an example of how memory can influence appraising, consider a Personal Property appraiser who picks up a ceramic item signed with a set of blue crossed swords[JC1] . The appraiser recognizes this mark as one used by Meissen since the early 1700s to identify their superior ceramic works. The appraiser also remembers that the Meissen mark has was copied by many other manufacturers, resulting in scores of similar-looking marks on ceramic items.[ii] Careful and experienced observation of the item’s other value characteristics brings him to a conclusion that he needs to research the identical source of the mark rather than making an on-the-spot decision about authenticity. The appraiser has avoided being misled by confirmation bias, which is a cognitive bias based on memory.
The combination of these two neurological functions – what we remember and how we react to the memory – affects decision-making of appraisers, appraisal reviewers, and judges in their daily workload. “In the memory making process, attention is considered a stage between sensory register and short-term memory. Short term memory formation can begin through giving your attention to the information received through sensory register.”[i] Thus, if an appraiser has a short-term experience which makes it to memory, it contributes to his or her opinion. It is possible the appraiser has a short-term experience which never makes it to memory and does not contribute to an opinion. The combination of these two neurological conditions forms cognitive bias which everyone has.A very long time ago people believed that the Earth was flat because no one could prove otherwise. But was that a valid claim? No one had any memory of going around the earth. This was the fallacy that all believed. Falling off the end of the earth meant certain death (or so we thought). The Merriam-Webster dictionary states that a fallacy is a “false or mistaken idea”, and further describes the term as “an often plausible argument using false or invalid inference.” The plausibility that the earth was flat is called the anchoring effect[i] – a decision-maker is attached to an initial bit of information. It is a bias and creates an error in decision-making. If there is no memory, is an idea false or mistaken? What happens when an appraiser finds something he has never seen before? Experts writing reports must be cautious to not fall into either or both bias and logical fallacy traps, as it is invisible to the appraiser. Experts reviewing reports must be skeptical to be able to see the bias and/or fallacy so that it can be called out.
Bias in decision-making comes in many forms[ii].
Overconfidence Bias – The most common observed in appraisal review, akin to Ipsy dixit, is excessive confidence in one’s own ability, particularly to predict or foresee future events. We have an effective date in our appraisal reports; and if that date is not in the past, this could be an issue.
Hindsight Bias – The appraiser sees past mistakes or occurrences as obvious. This is important in appraisal reviews when evaluating others’ decisions.
Anchoring Effect – Appraisers can attach themselves to an initial bit of information, placing too much emphasis on a single piece of information obtained early in the project. An experienced appraiser that is in a rush has the greatest potential for falling victim to this.
Framing Bias – An appraiser’s decision making can be affected by the manner in which data is presented by the Client. This can lead to individuals being deceived or manipulated by third parties. The most famous example of framing bias is Mark Twain's story of Tom Sawyer whitewashing the fence. By framing the chore in positive terms, he got his friends to pay him for the “privilege” of doing his work. The New York Times article mentioned later in this article about a residential real estate appraisal shows this bias in action.
Escalation of Commitment – Where an appraiser continues to follow what has proven to be a negative or unproductive course of action; this is also known as the sunk cost fallacy or sunk cost bias, because the tendency is motivated by an unwillingness to admit that he or she was wrong, or to accept that resources were lost or wasted. Not only is this the basis for Ponzi schemes, but a trap for appraisers with big egos.
Selective Perception – Multidiscipline appraisal reports can easily be subject to this. The various disciplines involved on a joint project have to find a common ground to reconcile conflicting points of view without this bias.
Confirmation Bias – A USPSP no-no where the appraiser looks for information or facts in a situation that supports a particular valuation. The appraiser’s conclusion must support the appraiser’s professional judgment and opinion, not the client’s stated desired outcome.
Availability Bias – Here the appraiser focuses only on immediate information or situations that come to mind at the onset of the engagement – another USPAP no-no. Due diligence in an appraiser’s research is essential to reach a defensible conclusion of value.
Representation Bias – This is a mental shortcut we use to judge the probably of an event or object (i.e., jumping to a conclusion). It is related to stereotyping. Here the appraiser believes that the situation at hand represents all of the characteristics of the population of which it is a part. Appraisers can fail to notice trends or may extrapolate data erroneously because they interpret it as fitting their preconceived notions.
Randomness Bias – This is an appraiser’s tendency to see patterns in otherwise random data that simply don’t exist, leading to an unreasonable reliance on insignificant results. Don’t try to reach for evidence that isn’t there.
Self-Serving Bias – This is the tendency people have to seek out information and use it in ways that advance their self-interest, unconsciously making decisions that serve themselves in ways that other people might view as indefensible or unethical. Look for this when doing your client management interviews. What would you think if a client tells you that they are proud of their on-time deliveries in one meeting, but blames shipping freight issues for other delayed shipments the next meeting?
Fundamental Attribution Error – This means that a person will make assumptions about certain people based on their actions while downplaying situational causes. It is one of the great destroyers of teamwork.
Rationalization Error – Rationalizations are invented explanations that hide or deny true motivations, causes, or actions. These include the excuses people give themselves for not living up to their own ethical standards, and often-times are unconscious. Ultimately, rationalizations dull our sense of responsibility for our wrongful actions. So, if we wish to truly be ethical people, we must carefully monitor our own rationalizations.Bandwagon Effect – The tendency to do (or believe) things because many other people do (or believe) the same. This type of cognitive bias helps explain why people often adopt fleeting trends. Appraisers need to be cautious of that new and trending methodology. Just because it’s new and trending does not necessarily make it reliable and defensible.
Status Quo Bias – This is just the opposite of the bandwagon effect and is the preference to prefer things stay relatively the same and oppose actions or methodologies that change how we do things. The business appraiser still doing the hybrid Excess Earnings Method is guilty of this. Remember, Rev. Rul. 68-609 states that this formula approach may be used in determining Fair Market Value only if there is no better basis available.
Recallability or Recency Bias Trap – This is the tendency to attribute disproportionate weight to recent events or to overact to contemporaneous business conditions when projecting financial performance. It can be easy to fall into this trap with hurricanes and tornadoes happening more frequently, and Covid-19 still in our rear-view mirror.
Survivorship Bias – This bias occurs when researchers focus on individuals, groups, or cases that have passed some sort of selection process while ignoring those who did not, leading analysts to form incorrect conclusions due to only studying a subset of the population and thereby pushing the results upward.
This concept of cognitive bias in appraisals has been around for a long, long time, recently becoming an important mainstream issue, especially in America. Attention to the reality of cognitive bias triggered the Appraisal Foundation Final Results Diversity Survey and National Association of REALTORS© 2022 Appraisal Survey. Also, FannieMae, FreddieMac and Harvard University have all conducted studies revealing surprising results. The Appraisal Foundation has addressed this issue[i] and continues to address it. Appraisers and reviewers need to be aware of the possibility of cognitive bias and how it can influence appraisals. This may be easier said than done.
Like bias, logical fallacies come in many forms. Some are oversights, while some are intentional. Let’s take a look at some of the various types of logical fallacies that an appraisal or appraisal review report might contain.
Ad Hominem – This type of fallacy uses personal attacks rather than logic to manipulate the reader’s opinion about the author without addressing core issues. An example of this might be where a reviewer states that the author of the appraisal report is incompetent because he is too young to know better. It could also be an opinion that the author is incompetent because they have not been accepted by a jury of their peers. This type of attack attempts to undermine the character of the person rather than the strength of his or her argument.
Argument from Ignorance – The earth is flat, or so we thought. This type of fallacy argues that something is true because it has not been proven false or there is no evidence against it. I recently saw this in an expert report where the author incorrectly concluded that the sale of a business did not occur because he did not have available to him all the documents to prove that the transaction did actually happen. The bias was clear: the earth is flat because we have no memory or knowledge of anyone going around it.
False Dichotomy – This type of fallacy presents limited options, typically by focusing on two extremes when in fact more possibilities exist. Consider the value of an item, whether it be a painting or a machine or a helicopter. The appraiser will consider what similar items have sold for (Explicit and Overt Bias). If the appraiser considers only two comparable sales and states that the item will sell for either XXX or YYY, the fallacy lies in the extreme. It is possible that the subject interest could sell for more than XXX or less than YYY or somewhere in between.
Slippery Slope – This type of argument suggests that a certain starting point will absolutely lead to a specific outcome with no supporting evidence. This is about relationships between facts or events and results. For example, one might claim that a windmill farm will minimize bird migration, which in turn will minimize bee pollination, which in turn will devalue farms. Will windmill farms really devalue farms?
Red Herring – This is an argument that uses confusion or distraction to shift attention away from a topic and toward a false conclusion. It is a diversionary tactic used to shift the focus of an argument to something easier or safer to address; and usually contains unimportant facts or events that have little relevance to the real issue. For example, one might argue that a piece of equipment is worth very little because it has not been used in three years. That is the red herring. The equipment is actually quite valuable because it has very specialized uses; and that specialized purpose is why it is not used frequently. This example also illustrates an implicit bias about frequency of use.
Appeal to Hypocrisy – This argument deflects criticism away from oneself by accusing the opposing side. It is an attempt to divert blame – yes, the blame game. An example of this type of deflection is where a kiln experienced significant damage shortly after being off-line for periodic maintenance. The cause of damage is claimed to be contaminated gas causing the kiln to burn too high. The provider of the gas attempts to shift the cause of damage to the kiln operator by claiming inadequate maintenance. This fallacy refocuses your attention, making an appeal to hypocrisy, with sleight of hand.
Causal Fallacy – This type of fallacy occurs when an argument incorrectly concludes that a cause is related to an effect. It could be a conclusion about what the cause was without enough evidence to be sure; in some cases, the action that came first is not what actually caused the effect. A belt broke on a piece of machinery. Was the belt just old, was the belt defective, or was the machinery not lubricated frequently enough to prevent the belt from deteriorating? The question is what caused what, not what happened first, or what is the most obvious.
Appeal to Authority – This is the misuse of an authority’s opinion to support an argument. If the authority is irrelevant to the topic, this is a fallacy. Appraisers of all disciplines must rely heavily on authorities and experts in many different areas. It is imperative that the authority relied upon is relevant and on target to the subject interest and transaction at hand.
There are many different types of fallacies and biases that we see every day. As appraisers and appraisal reviewers, it is important that we be cognizant of the traps that can be fallen into. Connect the dots, don’t jump to conclusions, focus on what is really important, and look in the weeds as well as beyond into the forest.
Terri Lastovka, ASA, ARM, CPA, JD, is a Certified Public Accountant, an Attorney, and an Accredited Senior Appraiser along with being accredited in Appraisal Review & Management in Business Valuation with the American Society of Appraisers. She is a Certified Domestic Relations Mediator (through the Supreme Court of Ohio) and is also a Commercial Arbitrator Panel Member of the American Arbitration Association. Terri has more than 30 years experience where she has consulted in the areas of business practices, financial considerations and tax issues as well as collateral monitoring, business succession, and workout. She also spent several years in industry as CFO of a chemical distributor. Email lastovka@valueohio.com
Richard J. Conti, ASA, ARM, owner and principal appraiser at Conti Appraisal Service, is an accredited personal property appraiser and Chief Assessor at City of Taunton, MA. He has presented extensively to appraisal professionals, attorneys, and the general public, and served as president of ASA’s Boston Chapter. Deeply involved in the development of the ARM program, Rick developed and taught an assessor-specific appraisal review curriculum to assessors through the Bristol County and Massachusetts assessor associations. It will be offered as an ASA Webinar on February 15, 2023. Email rick@contiestates.com
[1] What’s Your Slant? Bias in Appraising. Byron E. Miller SRA, AI-RRS, RAA, MSSE, 85th Annual ASA International Conference
[1] Two Types of Bias, Module 3: Bias and Well-Meaning People, National Center for Cultural Competence, Georgetown University. Accessed January 10, 2023. https://nccc.georgetown.edu/bias/module-3/1.php
[1] How Memories are Made; Stages of Memory Formation, Brian Becker, Associate Professor, Lesley University, https://lesley.edu/article/stages-of-memory.
[1] For more on Meissen’s crossed swords trademark: German Patent and Trade Mark Office, “The crossed swords,” August 5, 2022. https://www.dpma.de/english/our_office/about_us/history/30yearsofgermanunity/eastbrands/crossed_swords/index.html
[1] Ibid.
[1] The Business Professor, https://thebusinessprofessor.com/en_US/management-leadership-organizational-behavior/common-biases-and-errors-in-decision-making
[1] ibid
[1] USPAP Advisory Opinion 16