The Role of Thermodynamic and Informational Entropy in Improving Real Estate Valuation Methods

Abstract

Price, Cost and Income (PCI) are distinct economic indicators intrinsically linked to the values they denote. These observables take center stage in the multi-criteria decision-making process that enables economic agents to convey subjective utilities of market-exchanged commodities objectively. The valuation of these commodities heavily relies on PCI-based empirical observables and their supported methodologies. This valuation measure’s accuracy is critical, as it influences subsequent decisions within the market chain. However, measurement errors often arise due to inherent uncertainties in the value state, impacting economic agents’ wealth, particularly when trading significant commodities such as real estate properties. This paper addresses this issue by incorporating entropy measurements into real estate valuation. This mathematical technique adjusts and integrates triadic PCI estimates, improving the final stage of appraisal systems where definitive value decisions are crucial. Employing entropy within the appraisal system can also aid market agents in devising informed production/trading strategies for optimal returns. The results from our practical demonstration indicate promising implications. The entropy’s integration with PCI estimates significantly improved the value measurement’s precision and reduced economic decision-making errors.