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The Art market: a contradiction or a sound yet unconventional financial tool?

Eduard Steimle - 7th June 2019 - 0 comments

Arguments and opinions to entertain bored minds about alternative investments.

Any specialised article or a quick search on Google about the global art market seems to highlight falls and rises of artworks values. Just like you would read about the New York stock exchange or any investment funds.

On the other hand, if you ask anyone to define art, probably they will tell you something along the lines of “art is genius” or even more “art is spontaneous”.

One of Andy Warhol “Dollar Signs” paintings from 1980s, highlighting the relationship between art and money

Therefore, can we really talk of a market of genius and spontaneity? Does creativity follow economic cycles? How can someone speculate on artistic talents? This post is not intended to reinvent the wheel: art has been traded since the early stages of humankind. We would just like to pinpoint some of the features of the art market, as we believe these make it such a unique arena where unconventional commercial dealings are conducted.

The features we are just about to tackle: the roles played by experts and by informational asymmetries within the global art market.

Information is believed to be the most efficient tool to lower the cost of transacting in any market (far be it from us to discuss economics, if you really want indulge yourself in an explanation of transaction cost theory we recommend this quick read). And in the art market accessing information is almost as difficult as avoiding body contact with strangers on a Monday morning commute to work at peak times. Information about willingness to pay is not easily disclosed by auctions and art buyers as they leverage on this scarcity to make future profits.

Besides, profits on the buying-selling of art pieces are not uniquely based on rational processes such as information disclosure. Tastemakers or experts play an important role in the art world. They enable their members and the market to build consensus or understanding (or even liking) around the perceived importance of an artist or art work, which can have a direct impact on its economic value. Because it goes without saying: experts sing a certain artist’s praises and collectors buy his/her work.

A shot from the movie “The best offer” (2013) recreating an auction

Starting from these features, without even digging into a deeper analysis of the complete series of the art market dynamics, you may better understand why we were talking about unconventional trading. Yet, researches has shown that art can be a very lucrative investment, less risky than a portfolio of national stock.

It seems that despite all these unique features, the art market is a “solid” market after all. We could argue that its strengths lie within its peculiarities, such as being so closely linked to experts opinions more than economic cycles. As Warhol once said:

“Making money is art, and working is art, and good business is the best art.”

Therefore we may not know if the art market is financially sound or not, but we can start making an art of it.

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