If you ask an developer, investor, lender, or an appraiser how they make a decision to develop, invest, lend, or make a value judgment, you might get an involved, complex answer. However, the one thing that all these answers would have in common might be the final step which is typically, “the decision ultimately came down to a ‘gut feeling.’ Gut feeling is an expression people use to explain the decision-making step, usually the final step before the decision is made, in which they have to use judgment to solve an ill-defined problem. An ill-defined problem is a situation where the parameters of the problem are not clearly defined and there is subsequently no single correct or easy answer. Another way to express the concept of an ill-defined problem is decision-making under uncertainty.
The ‘gut-feeling’ concept is particularly important in real estate because many problems in a real estate context are ill defined and requires human judgment. The real estate industry is complex and there is often limited data (incomplete with limited reliability) with no unifying theories for people to base objective decisions. Therefore, subjective “gut feeling” is a substitute and subsequently human judgment is usually the deciding factor in a real estate decision (to develop, invest, lend, etc…).
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