Do appraisers perpetuate ‘the illusion of accuracy’?

The temptation for many business appraisals in this highly technical and analytical field is to “present a number that is less accurate but looks more accurate,” says David Wanetick (IncreMental Advantage). For example, he just recently valued a client’s patent portfolio at $5.0 million, a number that might not “look right,” he says. “The concern is, when people see the cover of the report, they will reflexively believe that this is a generic number.” As a result, the temptation is to present a number that perpetuates “the illusion” of greater accuracy, such as $4.85 million or $5.125 million. Had he done so in this case, Wanetick says, he would have been wrong. “According to my analysis, the value was $5.0 million and the number I published was $5.0 million.”

Similarly, when developing a decision tree, he will find that some of the various scenarios equate to a flat 50% risk, which might look like an uneducated “guess” compared to 45% or 52.5%. Repetition of a number within an analysis presents another temptation; if a reasonable royalty rate is 6% but so is the premium to the discount rate, then it might appear more accurate to change one of the numbers. However, if 50% or 6% or any other number “best reflects the analysis and can be supported,” Wanetick says, then that is the number the analyst should use.