Applied Microeconomics in the Law : Non-Systematic Risk Adjustments in Appraisal Practice within the Fair Market Value Standard’s Hypothetical Marketplace

The Fair Market Value Standard (FMVS), an applicable standard of value in several areas of law for appraising non-marketable assets, defines, through its given assumptions, a competitive Hypothetical Marketplace within which FMV determination is confined. Contra conventional assumption that Hypothetical Investors are limited to the typical real-world investor's wealth level, the FMVS's “purely hypothetical” Hypothetical Buyer is not constrained by real-world considerations—e.g., he faces no wealth constraint on his rational investment behavior. Being well-informed, he knows the benefits of diversification. Being rational, he prudently owns a well-diversified portfolio with equal dollar positions in 20-to-30 assets. To rationally maintain this diversification, he is “in the Hypothetical Market” for assets equal in value to those in his portfolio. Being financially able to purchase the subject asset and rational in his investment behavior, he must be assumed to possess sufficient wealth of at least 20-to-30 times the subject asset's FMV. Being well-diversified, he requires no form of discount for diversifiable non-systematic risk to be willing to purchase a subject non-marketable asset under FMV appraisal