Tuesday, May 31, 2011

Can the CAPM Explain Art Price Dynamics?

As an intellectual (and a tenured professor with plenty of free time), I read the Arts Section of the NY Times.  Today's lead article is about finance and art.  The authors are puzzled about asset price dynamics and why there is dispersion across firms (i.e artists) with respect to their rate of return.

To quote the article:

"Prices for the work of a variety of artists, including some top names like Larry Rivers, Eric Fischl and Francesco Clemente, have declined or stayed flat at auction in recent years, according to data compiled by Artnet, a company that tracks such sales.  For example, a Dutch Masters painted cigar box, created by Rivers and valued as high as $40,000 last year, sold in September for less than $4,000."

Nonetheless, at a time when so much attention is paid to skyrocketing values, the dreary performance of some artists’ portfolios is a topic seldom broached.

“We in the auction business want to put our best foot forward, so when we get a good price, we make a big fuss about it,” said Elaine Stainton, the director of the painting department at the auction house Doyle New York. “When we have a disappointing sale, we keep our mouths shut.” Perhaps nothing in the art world is as mystifying to the layman as the often abrupt changes in works’ values." 

But how to explain the cruel backslide of artists whose work escalates, then slips in value? Just as it is difficult to pinpoint precisely why work by some artists rises in value, experts say it can be harder still to explain why some artists’ value declines.

“There is a constant ebb and flow in art historical reputations,” said Jeffrey Deitch, a longtime New York gallery owner who now directs the Museum of Contemporary Art in Los Angeles. “The reputation of even the greatest figures like Picasso are in flux.” "

THE NY Times believes in a "new news" theory of asset price dynamics;  to quote the article;

"Prices can be hurt by negative reviews or if an artist has gone a long time without a major exhibition. And it helps to have work held by a famous collector: high-profile collectors create high profiles for the art they purchase. "

So, there are non-small players in this market who can manipulate it?

The article also has a fair chunk of "behavioral finance" implicit in it.  "sucker buyers" who are not informed about the true supply of various artists such as Warhol.  

Now, the interesting thing about Art is that it represents both consumption and investment (like Solar panels) . You can boast about owning it and show it off. How much of the "dividend" flow value you receive depends on your utility function and where you live. If you live in Fargo, can you show off your Picasso to that many people?    In the case of Google shares, you can't show those off.  With Facebook still private now, those guys who own it from the "private market" can show that off. How much of the IPO premium is due to this?