Heterogeneous Information and Appraisal Bias

Abstract

This study examines the heterogeneous appraiser behavior and its implication on the traditional appraisal smoothing theory. We show that the partial adjustment model is consistent with the traditional appraisal smoothing argument (Geltner 1989) only when all the appraisers choose the same smoothing technique. However, if appraiser behavior is heterogeneous and exhibits cross-sectional variation due to the difference in their access to, and interpretation of information from various sources, the model actually leads to a different outcome: The appraisal-based returns may exaggerate rather than understate the volatility of transaction-based returns. Using data from the residential market, we find that the appraisal-based returns are in fact less “smoothed” (or more volatile) than the comparable transaction-based returns. This finding suggests that the traditional appraisal smoothing theory, which fails to consider the heterogeneity of appraiser behaviors, exaggerate the effect of appraisal smoothing.