New York Times: Economists Have Advice for Buyers as the Art Market Heats Up by Eduardo Porter

Economists Have Advice for Buyers as the Art Market Heats Up
By EDUARDO PORTER

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 class.

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 benchmarks.

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."