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Art Investment: Profit or Pleasure?

feralhorses - 10th June 2019 - 0 comments

The true motive behind collectors’ passion for art.

Norman Rockwell, Tough Call (1949). Courtesy of Heritage Auctions.

The reporters never get tired of disclosing difficult-to-imagine sums of money that collectors make thanks to art. Oprah Winfrey sold Gustav Klimt‘s Portrait of Adele Bloch-Bauer II (1912) for a record $150 million, making 71% profit in 10 years. Owners of an old signed print (on the picture above) became rich overnight, when their art piece turned out to be an oil-on-paper original. Moved by these success stories good-luck seekers rush to buy art pieces at auctions, as once did gold-hungry men during the gold rush. The question remains, is art market a winner-take-all game?

Motivation of art owners

Let’s get into the skin of art collectors to understand the major motives driving them to purchase art. Numerous research on collectors’ behaviour outline three reasons to invest in art pieces: social status, pleasure and monetary returns. A famous US comedian, Adam, who ruins everything for us from college to electric cars, has also given his sour description of the art market. So he would (in a very persuasive way) limit this list of motives only to money hunger. However, let us give a chance to the poor wealthy of this world and try to believe in their virtues.

As a matter of fact, nearly two-third of the worldwide art market is concentrated in the hands of financial, real-estate and construction and retail industry representatives. For them owning or supporting artists’ work translates into philanthropy, social responsibility and good taste in the eyes of society. Moreover, many of the art owners claim that pleasure from viewing the art piece often serves as the underlying reason to purchase it in the first place.

“Luckily for the art industry, these fabulously wealthy men like art”

Finally, collectors are in it for money. If you watched the Adam’s video that was mentioned earlier, you are definitely convinced of it. However, when statistically comparing historical art market returns with the regular stock market or even risk-free bonds, we notice that profit from art is following the overall market trend, but shows slightly less risky patterns. Here you can see the graph comparing Canadian stock market with the art market in the timespan from 1970 to 2001 [1]. What it means is that art market was never famous for crazy profits, on the contrary overall modest returns label the investment environment as mostly long-term.

A time series of annual Canadian art price, equity, and risk-free returns from the period July 1970 through June 2001

“Pleasure cost” in art investment

However, if the pleasure notion is true, then investment in art is very different from buying stocks in a way, that there should be an extra cost for aesthetic enjoyment. A hypothesis emerges here: is the lesser return a direct result of “pleasure cost”? Indeed, in the scientific literature, the emotional benefits of art have been measured by looking at the differences between the financial returns of art investment compared to the respective returns in financial assets [2]. Another approach to evaluating “pleasure cost” is that the consumption benefits of viewing art should be revealed in the rental fees for art objects[2]. Lastly, we can measure the size of psychic benefits from art objects by estimating the marginal willingness to pay for viewing art in museums via analysing data gathered from citizens[2].

Certainly, the best way to evaluate the emotional benefits from art is to combine estimates from different mentioned approaches. Yet, each methodology proves that aesthetic pleasure is a permanent characteristic of an art piece, consequently, is neither a cost, nor an additional profit for an individual owner, who bought it for a market price and plan to sell it in the same manner.

What’s in it for you and me?

So we come to a conclusion, that Klimt’s Portrait of Adele Bloch-Bauer IIpurchase by Asian billionaire for $150 million can be explained by high social status acquired along with the painting, the pleasure of viewing it and the rising value of the famous art piece, unlike his billions on their own. But even if we seem to understand the motivation of wealthy collectors, what does that all mean for us? Should I opt for investing in art pieces if I am a regular investor looking for returns? Is it a good way to diversify my portfolio? Can I rely on the rules of the stock market when investing in art?

Gustav Klimt, Adele Bloch-Bauer II (1912), detail. Courtesy of the Neue Galerie.

These are the questions I am set to address in this blog. Please, share your understanding of profit vs pleasure in art investment.

[1] Hodgson, D. J. & Vorkink, K. P. (2004). Asset Pricing Theory and the Valuation of Canadian Paintings. The Canadian Journal of Economics, 37 (3), 629-655.

[2] Frey, B. S., & Eichenberger, R. (1995). On the rate of return in the art market: Survey and evaluation. European Economic Review, 39(3–4), 528–537.

Written by Olga Ignatyeva

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