This is a good point and it was going to make it in my original post!
I was going to say that the $1,000,000 price (as opposed to $100,000) tag on a piece of land will tend to be indicative of the value of the piece of land, assuming you weren't in a drunken stupor when you paid a million bucks for it. In other words, most decisions in life aren't bets made in a vacuum.
The inference though is that the million dollar land _was_ worth that much because it was next to a (now-condemned) shopping centre, and the cheaper land was next to nothing; the new subdivision means the values have changed dramatically. Extreme example, but the point is the price paid is irrelevant if circumstances render it so
It is indicative of the value of the land but says very little about whether you should or in what way you should choose to develop either plot. The surrounding economy, zoning and geography will have far more to say about that.
This is true. However, suppose that all you knew about two plots of land was that one was bought for $1m and one was bought for $100k. Then, someone asks you which one you should develop.
Buying land isn't like betting on black. Land has a history, markets are (more or less) efficient, and buyers are usually rational. The sunken cost fallacy suggests the answer is a coin-toss, but in the real world, the correct answer would (usually) be the expensive plot.
I think this comes down to correlation versus causation.
The fact that someone (perhaps yourself) valued a property highly recently is correlated with that property having a high present value. But it does not cause it.
It is possible the million dollar purchase was a mistake, or that something has changed and it's now worth far less. Valuing a property highly may cause you to have paid a lot of money for it, and that might be a reason to assess the current value highly. But that's very, very different from valuing a properly highly because you paid a lot of money for it.
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This is a good point and it was going to make it in my original post!
I was going to say that the $1,000,000 price (as opposed to $100,000) tag on a piece of land will tend to be indicative of the value of the piece of land, assuming you weren't in a drunken stupor when you paid a million bucks for it. In other words, most decisions in life aren't bets made in a vacuum.
The inference though is that the million dollar land _was_ worth that much because it was next to a (now-condemned) shopping centre, and the cheaper land was next to nothing; the new subdivision means the values have changed dramatically. Extreme example, but the point is the price paid is irrelevant if circumstances render it so
It is indicative of the value of the land but says very little about whether you should or in what way you should choose to develop either plot. The surrounding economy, zoning and geography will have far more to say about that.
This is true. However, suppose that all you knew about two plots of land was that one was bought for $1m and one was bought for $100k. Then, someone asks you which one you should develop.
Buying land isn't like betting on black. Land has a history, markets are (more or less) efficient, and buyers are usually rational. The sunken cost fallacy suggests the answer is a coin-toss, but in the real world, the correct answer would (usually) be the expensive plot.
I think this comes down to correlation versus causation.
The fact that someone (perhaps yourself) valued a property highly recently is correlated with that property having a high present value. But it does not cause it.
It is possible the million dollar purchase was a mistake, or that something has changed and it's now worth far less. Valuing a property highly may cause you to have paid a lot of money for it, and that might be a reason to assess the current value highly. But that's very, very different from valuing a properly highly because you paid a lot of money for it.