Studies & Opinions
Types of Domain Name Appraisers
October 20, 2007
There are two types of domain name appraisers,
designated here as type “1” and type “0,” with the former being
appraisers who rely on a scientific approach. A large number of
domain owners use the services of type “0”—the nonscientific—or
do the appraisal themselves. Approaches used by scientific appraisers
include regression-type statistical modeling, discounted cash-flow
analysis, and reliance on the Law of Large Numbers.
This essay looks at some of the typical erroneous arguments against taking a statistical
approach and provides an example from law to shed light on some
success stories with statistical models that have changed people’s
minds. For a concrete example, we use a study on predicting Supreme
Appraisal vs. Valuation
“Appraisal” and “valuation” are typically
used interchangeably. Although they are both based on opinion,
whether that of an individual or group, a valuation is different
in that other researchers can replicate it. Nevertheless, this
does not necessarily imply that appraisals cannot provide verifiable
predictive accuracy or are inferior to valuation models.
Supreme Court Decision Making Study
The stud compares the predictive
accuracy of legal experts to statistical regression. The selected
experts for the study include scholars (five of whom had been
law school deans), practitioners, and pundits. The regression
model used only six factors: (1) the circuit court of origin;
(2) the issue area of the case; (3) the type of petitioner; (4)
the ideological direction of the lower court ruling; (5) the type
of respondent; and (6) whether the petitioner argued that a law
or practice is unconstitutional. The model’s dataset was composed
of 628 cases previously decided by the nine justices.
The regression model predicted
75% of the affirm/reverse results correctly, while the legal experts
collectively got 59.1% right. The model also predicted Justice
O’Connor’s vote (a swing vote) correctly 70% of the time, while
the experts’ success rate was only 61%.
Common Criticism of Statistical Models
Unjustifiable skepticism over the use
of statistical models for prediction is not confined to domain
name valuation. Other fields include law, wine rating, sports,
and medicine, to name a few.
Common themes voiced by the skeptics
include too many variables, only “experts” can do it, not enough
data, and confusing statistical results. Below I address each
of these issues separately.
Too many variables. This criticism does not refer to situations where there are too many variables
to estimate compared to observations. Rather, the argument
maintains that there are too many hard-to-quantify variables
and that not all variables have an impact on all domain names—i.e.,
there is a large number of domain name–specific factors. To
counter this argument, the Supreme Court case above demonstrates
that six predictors, a relatively small number, perform better
than the experts.
Only “experts” who have buying and selling experience can appraise. The Supreme Court
study also provides a counterexample using regressions. Moreover,
in general, by aggregating opinions, irrespective of expertise,
one can come up with a robust value estimate. The latter approach
is based on the Law of Large Numbers instead of regressions.
Not enough data. A significant amount of data on sale prices is publicly available, although
the publicly available data does becomes thinner for domains
sold for greater than $250,000. Nevertheless, there are sources
of data, other than sales prices, that can shed even more
information on domain name values.
Statistical results are confusing. The group voicing this particular
complaint does believe in the power of statistics,
but they hear contradictory messages and are left to wonder
who is right and who is wrong. “Coffee is good for you,” “Coffee
is bad for you,” “Domain guru says appraisals are useless,”
“Domain guru says statistical appraisals are, in general,
the most robust.” Who should you believe?
Unfortunately, there is no easy way to
decide, especially when you are not an expert in the field. One
solution is what Andy Grove, the chairman of Intel, did when he
had to decide on the method of treatment for his cancer. He dug
into the relevant literature to better understand it. Obviously,
not everyone has the learning ability, time, or desire to follow
such an approach. Although a domain name’s appraisal is not a
matter of life and death, you want to make sure that you are not
taken for a ride. Thus, at a minimum, you need to be aware of
some common sale pitches and their weaknesses:
a. “We have more stats and data.” Ask them how do they know that
they have more stats than their competitors and how much difference
in value precision does their additional data lead to?
b. If they believe that the length of the domain name is a strong
predictor of value, ask them why their belief contradicts other
c. When someone tells you “I believe company X is the best appraiser,”
ask them why. Would that be based on statistical prediction accuracy
or the closeness of the appraisals to the recommender’s estimates?
Is Domain Appraisal Worth It?
Standard appraisal fees range from zero
to about $40 per domain name. If you have a domain name that is
a non-dictionary key word, then statistical models might not be
the right approach. On the other hand, for a domain that is a
combination of dictionary key words, a fast check of the frequency
of the occurrence of the key words and the corresponding number
of Ad Sponsors on Google (in addition to checking the domain’s
extension and traffic volume) can give you an idea of whether
it is worth spending the money on an appraisal and whether a more
accurate appraisal is worth the extra cost.
For additional references
on domain name appraisal, click