[Paleopsych] NYT: Economists Have Advice for Buyers as the Art Market Heats Up

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Economists Have Advice for Buyers as the Art Market Heats Up
NYT December 1, 2004

Art prices are setting records again. In early November
"No. 6 (Yellow, White, Blue Over Yellow on Gray)" by Mark
Rothko was auctioned at Sotheby's for a record $17.4
million, almost 50 percent above the top end of Sotheby's
estimate. "The Ninth Hour," a room with a lifesize wax pope
felled by a meteorite, by the Italian artist Maurizio
Cattelan, fetched $3 million at auction at Phillips, de
Pury & Company, also exceeding its top estimate by half.

Not only are modern and contemporary artists being treated
like pop stars, but earlier American masters are also
soaring like late-1990's Internet stocks. Today Sotheby's
is putting "Group With Parasols (a Siesta)," by John Singer
Sargent on the block with a top estimate of $12 million.
This would be a record for the artist at auction.

"We have more collectors today willing to spend more money
than we've ever had," said Dara Mitchell, a director of the
American paintings department for Sotheby's.

These rates of return are now attracting the interest of
financial investors. In Britain, there is the Fine Art
Management Fund, which has been in the market since March.
A former co-owner of Phillips, de Pury & Luxembourg
established Artvest, an art investment company, in the
spring. The New York-based Fernwood Art Investments plans
to establish several funds next year to buy and manage art
portfolios. And virtually every bank on Wall Street has an
art advisory group to assist rich clients.

The renewed appetite for art as an investment is rekindling
interest in developing systematic ways to assess the value
of art and is drawing attention to a small number of
scholars who have been applying economics to this new asset

Two pioneers are Michael Moses and Jianping Mei of the
Stern School of Business at New York University. Mr. Moses
and Mr. Mei developed an index of repeat sales of the same
work of art, compiled from the prices of thousands of
artworks sold at auction since 1875. They found that the
compound annual rate of return of art from 1953 to 2003 was
12.1 percent, slightly higher than the Standard and Poor's
500 stock index.

Mr. Mei and Mr. Moses also found that art prices have a low
correlation with stocks, so art can enhance the performance
of a portfolio of equities. Perhaps most interestingly,
they found that the art-dealer maxim that masterpieces are
the best investment is wrong. According to their index,
masterpieces - usually meaning the most expensive works of
art - tend, instead, to appreciate less, or depreciate
more, than the art market as a whole.

Economic analysis has also exposed some other peculiar
behavior. Two economists from Oxford University have found
that presale estimates by auction houses have some
systematic biases. In contemporary art, for some reason,
the most recently executed artworks are overvalued. For
Impressionist and modern art, physically wider paintings
may be underestimated.

David Galenson, a professor of economics at the University
of Chicago, has been using the prices of artworks at
auction to study patterns of creativity. His findings
include useful insights into what makes art valuable. For
instance, collectors might think again before paying big
prices for late pieces by Pop artists. Their most expensive
and critically acclaimed work, according to Mr. Galenson's
analysis, was done at the beginning of their careers, when
the breakthrough idea that took them to the top - the
mechanical reproduction of serial images, for example, or
blowing up cartoon frames - was still fresh. The Abstract
Expressionists, on the other hand, might be better bought
old - once they have experimented enough.

Mr. Galenson splits creativity into two camps, inductive
and deductive. Inductive-minded artists - say, Claude Monet
or Jackson Pollock - will experiment endlessly, with no
precise endpoint in mind. Deductive conceptualists, on the
other end, rely on the great revolutionary idea that
springs forth fully formed - Marcel Duchamp's 1917 urinal,
"Fountain," for instance, or "Les Demoiselles d'Avignon,"
which Picasso painted when he was 26. "With conceptual
artists you can usually express their real contribution in
a sentence," said Mr. Galenson. Mr. Galenson also picks out
a broad shift in the market's taste over the last half
century, as the appetite for innovation favored the
quicker, deductive approach and thus tended to reward
younger artists. In particular, he found that artists born
before 1920 tended to do their most important work after
the age of 40, while those born after 1920 peaked before
hitting 40.

"A persistently high demand for artistic innovation has
produced a regime in which conceptual approaches have
predominated," Mr. Galenson wrote in a paper. "The art
world has consequently been flooded by a series of new
ideas, usually embodied in individual works, generally made
by young artists who have failed to make more than one
significant contribution in their careers."

Todd Millay, vice president in charge of strategy and
product development at Fernwood Art Investments thinks this
economic approach is helpful. "It's taking the tools and
techniques which have been useful to understand other
sectors of the economy and applying them to the art
market," he said. Mr. Millay is developing quantitative
techniques that Fernwood will use to build its art
portfolio. Mr. Moses said he and Mr. Mei are also putting
together a pricing model based on variables including the
number of times an artwork work has been exhibited, written
about or sold. And their analysis can provide some

For instance, the Sargent up for auction today will be
sold, by Sotheby's estimate of $9 to $12 million, at a
price somewhere between 375 and 500 times what it fetched
in 1962. But Mr. Mei's and Mr. Moses's index of American
art has appreciated only 136-fold in that period. "If I'm
looking for a financial return, maybe these prices are a
bit high," Mr. Moses said. "If you tend to buy above the
index-inflated purchase price, your future returns are
going to suffer."

Ms. Mitchell of Sotheby's stands by the value of the
Sargent nonetheless. "Paintings of uniquely superior
quality appreciate to a greater degree," she said. "Great
paintings have a different curve." She argued that
auctioneers have a pretty good handle on what an artwork is
worth, benchmarking against other recent works by the
artist sold and the overall state of the art market.

Auction houses have a big advantage: they already know the
fairly small number of people who can spend a few million
dollars on a painting. That means they have a pretty good
idea of who is likely to bid how much for the next big
artwork to be put on the block. "We have relationships with
collectors seeking works from certain artists," said
Matthew Carey-Williams, senior specialist for contemporary
art at Sotheby's. "The first thing we say when we look at a
piece of art is 'who is going to buy this?' "

Indeed, many art dealers tend to mistrust these economic
approaches to art. Andre Emmerich, the New York collector
and dealer, argues that there is no systematic method that
can measure the shifting tastes that ultimately dictate the
value of art in the market. "I'm not very good at these
abstract theories at all," Mr. Emmerich said. "Art has much
more to do with gut than with anything else."

Even some of the proponents of a more analytical approach
to art say it is uncertain how much these ideas will help
investors beat the art market. Merely measuring the market
is tough, because there are so few public transactions to
base any analysis on. And many deals take place privately
between dealers and collectors, so their details are
frequently not known.

Mr. Galenson argues that the art auction market is pretty
efficient. Indeed, prices tend to reflect what art critics
like and dislike. Orley Ashenfelter, a professor of
economics at Princeton who studies art auctions, said all
this analysis wass interesting, yet "I don't know how you
can make money from this."


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