A lesson from college physics: If you get lost, start over at F = ma (force = mass × acceleration). We can use that same strategy for property evaluation where similar first principles apply.

In a survey sponsored by the SPEE, respondents say they use discount rates of 20% or more. First principles tell us that the discount rate and the reinvestment rate should be the same. Using over a century of data, Siegel's STOCKS FOR THE LONG RUN shows that average returns for companies have been 5% after tax and after inflation. Not 20%. Either Siegel errs or respondents have no clue.

Consultants often raise discount rates to account for risks. Say the uncertainty for a project lies mostly in the cost to get production started. Raising the discount rate to account for cost uncertainty affects every yearly cash flow except the one with which we're uncomfortable. Initial investment remains virtually untouched by the higher discount rate. First principles tell us that discount rates measure time value of money, not risks.

Some analysts do FMV determinations failing to recognize the effects of competition. The identification and ramifications of the Winner's Curse enlighten us that a winning offer is not a reliable value estimate. First principles teach us that an auction winner because of his high side bias cannot claim to be "equally knowledgeable," a basic phrase to the FMV definition.

Misuse of the Capital Asset Pricing Model has mislead many executives into setting unreasonably high target returns. Academics signed on to a simple formula that they claimed captured the subjective investment decision making practices of a hundred million individuals. First principles inform us that no one has found such a formula because human behavior is unpredictable.

The paper describes these and a dozen other similar evaluation problems.

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