21 July 2011

Stuffed Sharks

I am about to return Don Thompson's The 12 Million Stuffed Shark: The Curious Economics of Contemporary Art to the library and wanted to make one quick comment.

The overall theme of the book is "How is it possible that contemporary art is selling for as much as it is?" And a fine question that is.

One parallel I see is housing. I think you can explain the high prices in contemporary art with many of the same explanations you could have used in housing circa 2006. (And still can, to a degree.)

  • No two houses or two pieces of art are exactly the same. (Yes, Warhol for instance would make several identical screen-prints of the same image, but each one has a different provenance, etc.) This makes pricing hard.
  • Both are often sold under high pressure scenarios. There is another buyer making an offer on the house you like, or there are other buyers either at an auction or in the opening hours or minutes of an art fair competing for the same pieces.
  • Both houses and works of art trade hands rarely, adding psychological pressure. Who knows when another item like this will be available.
  • No one is sure what a Damien Hirst is "really" worth in the same way no one knows what that three bedroom over on Elm is "really" worth since they aren't productive assets. It's not like they churn out a cash flow you can measure and compare to a purchase price.
  • As a result people are much more likely to pay what they can, not what they see the true value as being.
  • Works which enter museum collections are very unlikely to ever leave. This puts pressure on the supply of art in the market. This looks like an analog to household formation, but I would need to think about it more. Certainly the new museums opening in China and the Middle East are equivalent to new households.
  • People are led into being overly optimistic about prices rising. Realtors and many financial "gurus" on the one hand and dealers and auction houses on the other play into this misapprehension. Furthermore big increases in sales prices are widely reported, but failed sales and decreases in value are not news.
  • Like a house, many owners of art would prefer not to sell at all rather than take a loss. Dealers are far more willing to drop an artist from their stable entirely rather than reduce prices on their work. This leads to ratcheting.
  • Prices are highly based on neighboring prices. Either literally neighboring, in the case of housing, or in the case of art, neighboring in an abstract space. The pricing of a work is highly dependent on recent prices by the same or similar artists, genres, periods, mediums, etc. This creates positive reinforcement which is destabilizing.
  • Some of the most fascinating sections of the book were those that dealt with auction houses.  They are in an interesting position of representing the seller, but also being an advisor to the buyers.  They want to maximize price for the seller, but also insure the buyer is willing to come back for more auctions in the future and is willing to consign art to them when he is ready to sell.  There is a complicated commission structure which is variable depending on the deal  Throw in many other complications that arise when there are price guarantees and reserve prices, or complications when art is consigned by a divorcing couple, or when there are privately negotiated sales in addition to auctions, and you get a right game theoretic mess.  Furthermore there is competition between Christie's and Sotheby's but also a pretty cozy duopoly.

    I would be interested to see some examination of this agency problem and that for realtors in housing.

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