Case Assignment: Land Within The Municipality Of Springfield

Case Assignmentall Land Within The Municipality Of Springfield Is Zon

All land within the municipality of Springfield is zoned for either agriculture, residential, or commercial use. You have purchased a parcel of agricultural land for $20,000, expecting it will be rezoned next year. The rezoning decision is controversial and will be made by the City Council. Inside sources indicate a 30% chance the land will be rezoned for commercial use, with an expected resale value of $50,000. Additionally, there's a 50% chance it will be rezoned for residential use, with a value of $30,000. If the land remains agricultural, it will retain its original value of $20,000.

Mr. Hi Roller, another land speculator, has approached you, believing the land will be rezoned, and offers $30,000 now. You need to decide whether to accept this offer or hold for a potentially higher future value. To make a rational decision, you decide to apply the Delphi Procedure, which involves gathering expert opinion and assigning probabilities to different outcomes to determine the expected value of each decision alternative.

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The Delphi Procedure is a structured communication technique, originally developed as a systematic, interactive forecasting method that relies on a panel of experts. In decision-making contexts, especially those involving uncertainty, it helps aggregate expert opinions, achieve consensus, and reduce bias by iterative rounds of anonymous input and feedback. While traditionally used for expert panels, it can also serve as a framework for managing uncertainties and establishing probabilities in complex decision scenarios, such as real estate rezoning decisions.

In this case, the use of the Delphi Procedure involves several steps. First, individual predictions about the likelihood of rezoning outcomes are gathered from a panel of informed experts—such as city planners, real estate analysts, or experienced land developers—without influence from groupthink. These predictions include probability estimates of the land being rezoned for commercial use, residential use, or remaining agricultural. The first round data are then summarized, and feedback is provided anonymously to the panel. Experts review the aggregated predictions and revise their estimates in subsequent rounds, aiming to converge toward a consensus probability distribution for each outcome.

Applying this method, suppose experts provide the following probabilistic assessments after several rounds: a 30% probability of commercial rezoning, a 50% probability of residential rezoning, and a 20% chance that the land remains agricultural. These estimates can then be used to compute the expected monetary value (EMV) for selling now to Mr. Hi Roller versus holding out for potential rezoning benefits.

The expected value of selling now at $30,000 is straightforward: $30,000. For holding the land, the calculation considers the probabilities of each rezoning outcome and their associated values:

EMV of holding = (Probability of commercial × Value if commercial) + (Probability of residential × Value if residential) + (Probability of agricultural × Value if agricultural) - Original value or holding cost.

Using the estimated probabilities, it becomes:

EMV = (0.30 × $50,000) + (0.50 × $30,000) + (0.20 × $20,000) = $15,000 + $15,000 + $4,000 = $34,000.

This calculation indicates that, based on expert consensus facilitated through the Delphi Method, holding the land offers an expected value of $34,000, which exceeds the $30,000 offer from Mr. Roller. Therefore, the rational decision, supported by the Delphi-based probability assessment, is to hold onto the land rather than accept the immediate offer.

In summary, the Delphi Procedure provides a systematic way to quantify uncertainties by harnessing collective expert judgment, which enhances the decision-making process in complex, uncertain scenarios like land rezoning. Through iterative feedback and aggregation of probabilities, it allows investors to evaluate the expected value of different options with greater confidence, ultimately leading to more informed and rational choices.

References

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