History of Methodology in the Professional Valuation of Capital

Abstract

This 50-page survey of methodological history in the area of Professional Valuation aims to deliver a historic analysis of the methodological material and context which lay behind the foundation of the Professional Valuation - first institutionalized in the United States by the Appraisal Institute during the period of The Great Depression.

We come to the conclusion that during this period the Professional Valuation methodology (back then mostly focused on the appraisal of real estate) can be broadly characterized as possessing a non-positivist slant. This means that, in the perception of the first methodologists of the Profession, appraisal values were not supposed to be in the likeness of prevailing market prices other than by accident, viz. they have been conceived as broad anticyclical metrics of sustainable values in the framework of long-term 'normal prices' from the Marshallian price analysis. Conditions of the Great Depression were favorable to the dissemination of this non-positivist view of professional appraisal functions, according to which the Profession tended to regard itself as an explicit public interest profession consciously combating the destruction of values amidst the extreme seizure of the capital markets.

After the World War II and the settling of capital market activities into the growth mode accompanied by the generally increasing public affluence, there had occurred a gradual shift toward a more positivist view of the appraisal functions. The profession began to trust market prices and the new winds among valuers caused them to believe that their functions should include nothing more than reflecting prevailing market prices and certifying them as 'values' in their reports. By 1960th the valuers had become mere passive scorekeepers/reflectors of the market and abandoned all the aspiration of them ever possessing some pricing influence to serve public interest. The conscious annunciation of this new significantly desiccated ideology occurred during a so-called ‘positivist revolution in valuation methodology’ pioneered by such writers as Wendt, Ratcliff, Kinnard etc. Their views were paralleled and reinforced by dogmas of the so-called new classical economics that included the proponents of efficient markets theories. Since their time, the mechanistic, purely positivist functions of the valuation profession have been taken for granted and still dominate its worldview. Beyond them the profession ventures not.

Our analysis, by building on the ‘liquidity pricing scientific research program’ pioneered in the modern day by such researchers as Plantin, Sapra, Shin, Carletti et al, attempts to bring to light what we contend are substantive merits of the non-positivist valuation doctrine of the Depression Era methodologists (such as Babcock, Schmutz & MacKomrick, Hyder etc.). The revival of such a doctrine will help to impregnate with new vision and scope currently ongoing disputes about public benefits of the fair value accounting etc. As for professional valuers themselves, by reading this paper they will benefit from understanding the historic and general economic context of the development of the three-approaches-to-value doctrine, and also gain an insight into interpreting the Market value basis convention and how it evolved overtime. The hidden conceptual facets of the Elwood approach to valuation, not discussed elsewhere, are also highlighted in this paper, as are some distinctions of emphasis between the American and British schools of valuation thought.

Most importantly, in doing research this paper treats valuation profession as an institution which has important macroeconomic role to play in guiding the pricing processes on the capital markets. Because of this, there is a clear-cut case to regulate the methodology of this profession on the national level and having regard to explicit macroeconomic and public interest, not merely to private interests of the entirety of consumers of valuation services or the valuation industry itself. In all this, some strands of the non-positivist valuation methodology highlighted in this paper emerge that can serve as arrows in the quiver of regulators to encourage the empowerment of Professional Valuation with its newly-found macroeconomic & public interest authority and related duties.

Therefore, this survey is not intended as another survey of mere technical tools of valuation or their development, but as a broad survey of evolving socio-economic vision and forces underlying the methodology that created those techniques and tools.

Note: Downloadable document is in Russian.

Keywords: Methodological history of Professional Valuation, Positivist revolution in Valuation, Neoclassical roots of the Professional Valuation methods, Public and Macroeconomic role of the Professional Valuation

JEL Classification: D46, G28, G29