I just finished another book I’d recommend, The Myth of the Rational Market by Justin Fox. It’s a superb history of economic and financial theory over the last two hundred and fifty or so years, and gives appraisers a deeper understanding of how we got to where we are (wherever that is) and where we might go from here.
What I took away is that recent events have shown, again, that rational models, particularly those based on historical data, however useful, cannot capture the irrational forces that influence markets and prices. These prices, and the cost of (equity) capital, are forward-looking, based on expected risks and cash flows, which are themselves unpredictable (within limits). As such, a totally formula-based methodology like CAPM or a build-up will not suffice. There has to be – thank goodness! – judgment, especially in times like these in which current conditions are out of alignment with history. People need us to make those judgments!