An Economic Analysis Of An Aesthetic Asset
The Market for ArtAn Economic Analysis of an Aesthetic AssetThe Bay of Marseille, Seen from L’Estaque, Paul Cezanne, c 1885
Income Consumption Savings Consume today Save to consume more tomorrow Inflation Reward for putting off gratificationThe Blue Room, Pablo Picasso, 1901
Income Consumption Savings Types of savings Guaranteed return i.e. fixed interest Speculative return i.e. capital gain
Consumption v Saving Saving for financial return Stocks Bonds Savings accountsTwo Anglers, Claude Monet, 1882
Consumption v Saving Consumption for utility Food Entertainment Transportation
Consumption v Saving Goods that serve both functions Real estate Collectibles
Saving (Investments) Income generating Stocks Bonds Capital gainVibrant Landscape, Graham Gercken, 1960
Saving (Investments) Not all investmentshave both Capital gain only Precious metals Collectibles Art Beanie babies
What is art? Museum pieces Something I canpick up at WalmartIllustration, Daniel Craig, c 2000Mona Lisa, Leonardo da Vinci, 1503
There is no fixeddefinition of art experts and scholars disagree onexactly what art is supply is somewhat arbitrary price determined primarily bydemand for artMy Bed, Tracy Emin, 1998
Why consume art? Investment Satisfaction (consumption value)Massacre of the Innocents, Peter Paul Rubens, 1611, highest recordedauction price for a painting on the European market, 76.7 million in 2002
Who consumes (buys) art? The rich The rest of usThe Starry Night, Vincent van Gogh, 1889
The tax advantages of capital gainsThe Last Supper, Leonardo da Vinci, 1495-98
Art as an investment Risk return tradeoff Minimizing risk throughdiversificationWoman on a Terrace, Henri Matisse, 1907
Art as an investment Does art correlate positively ornegatively with equities? Different studies come to differentconclusions
Art as an investment Why the lack of consensus? Thin market for illiquid goods Do we compare prices only for thesame painting that is resold? If so, wehave few observations Or do we use hedonicmeasures, by comparingthe prices over time ofpaintings with similartraits? E.g. style (portraits), medium (watercolor), time period (18th century), artist (e.g. Picasso prints)Banana, Andy Warhol, 1966
Venus de Milo, Alexandros of Antioch, 101 BC
What determines a painting’s value? Subject matter Style Size Condition Artist Artist age at time of painting Where and when the piece is sold Agnello and Pierce: controlling for these variables, art investmentreturns are favorable to stocks by being able to diversify across artistsLa Ronde, Auguste Rodin, 1883-84
Why art has thrived but beanie babies busted Long history Fixed supply of masterworks Wider market The very rich buy art so it is conspicuousconsumptionBaudlaire’s Mistress Reclining, Edouard Manet, 1862
Conspicuous consumption Thorstein Veblen 1899 Consumption that is unrelated to value of a good Satisfaction from showing off what I consume Big house Fancy car Designer labels As the price of art goes up, so does satisfaction from owning itSeated Man, Georges Seurat, 1883
American Gothic, Grant Wood, 1930
Sky Above Clouds IV, Georgia O’Keeffe, 1965
Risk andreturn Higher variance generally means higher return Standard deviation is square root of the variance “standard” way of knowing what is normal andwhat is extraordinarily small or large (more thanone standard deviation from the mean)Broadway Boogie Woogie, Piet Mondrian, 1942
Risk and Return: Paintings v Dow Jones5040art hiart avg30art lodow hi20dow avgdow -40Moon and Clouds, Ansel Adams, 1959
Art Investment Consumption good Aesthetic pleasure Conspicuous consumption Research by Benjamin Mandel helps explain the low return (relative toDow Jones) to art despite its riskiness The measured “risk premium” of art is low relative to other risky assetsThe Creation of Adam, Michelangelo, 1508-12
Investing in Art The Masterpiece Effect Art dealers advise that it is better topurchase one 100,000 work than ten 10,000 works This should not hold Efficient mkt should bid away such a returnThe Ice is Good, Grandma Moses, 1961
The Masterpiece Effect Ashenfelter and Graddy study disputesthis Masterpieces (defined as top 10% byprice) do not outperform the rest. In factthey underperform Steady across prints, American, impressionist, old mastersamples Why would they underperform? Overbidding due to fame of artist leads to reversion to mean on resaleAt the Moulin Rouge, Toulouse Lautrec, 1892-95
Hunters in a Landscape,Anonymous, c 1575-95
Ashenfelter and Graddy
Ashenfelter and Graddy
Conclusion Art is both a consumption and investmentgood Conspicuous consumption: price return The value of art is in the eye of the beholder i.e. demand determines the price No particular benefit to investing in a specifictype of artFrozen River at Sunset, Aert van der Neer, 1660
Broadway Boogie Woogie, Piet Mondrian, 1942 . Risk and Return: Paintings v Dow Jones -40-30-20-10 0 10 20 30 40 50 1860 1880 1900 1920 1940 1960 1980 2000 2020 art hi art avg art lo dow hi dow avg dow lo Moon and Clouds, Ansel Adams, 1959 . . PowerPoint Presentation Author: Haupert Michael J
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