Is Art a Good Investment?

"The most expensive pieces of contemporary art sold at auction tend to under perform lower-valued paintings by about 5 percent per year."

In Art Auctions: A Survey of Empirical Studies (NBER Working Paper No. 8997), NBER Research Associate Orley Ashenfelter and co-author Kathryn Graddy review what is known about how the art auction system actually works and discuss whether art makes a good investment. They assess the accuracy of expert estimates of value, examine the determination of reserve prices, and explain why an economist would conclude that the settlement in the civil suit accusing Sotheby's and Christie's of price-fixing probably overcompensated buyers.

Because estimated returns on investments in art depend heavily on the time frame studied, the method used, and the data available, the authors conclude that it is difficult to come to any broad conclusions about art investment returns. They calculate that estimates of real returns from investing in art range from 1 to 4.9 percent in the 15 studies reviewed, but they caution that auction prices may reflect an unrepresentative slice of the art market, that transactions costs of up to 25 percent are not included in the estimates, and that investing in art involves significant theft and fire risks.

They find that auction house experts are generally truthful and accurate in their pre-auction price estimates, even though systematic over or under estimates are common for certain kinds of art. Experts appear to systematically overvalue recent contemporary art and systematically undervalue longer and wider paintings. Many people in the art trade are surprised that economists find strong correlations between the size of a painting and its price. Though experts advise purchasing the finest piece of art one can afford, the authors calculate that the most expensive pieces of contemporary art sold at auction tend to under perform lower-valued paintings by about 5 percent per year. Finally, the authors examine the available evidence and conclude that the secret reserve prices commonly imposed on items at auction are 70 to 80 percent of the auctioneer's lowest estimate of the item's likely selling price.

-- Linda Gorman

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