Vested Interests, Price Estimates, and the Future Performance of Artworks

Abstract

This paper employs a new data set from art auctions to examine the relationship between auctioneer presale price estimates and the long-term performance of artworks. While auction houses typically made no price estimates before 1973, they started providing high- and low-price estimates for all artworks thereafter. Thus, we have a natural experiment to observe changes in price behavior under the influence of auctioneer estimates. We find that the price estimates for expensive paintings have a persistent upward bias over a long period of thirty years. We also find that high estimates at the time of purchase are associated with adverse future abnormal returns. These results are consistent with the view that investors are credulous. They do not discount fully the strategic incentives of auctioneers. We have also examined the three alternative hypotheses of risk, consumption, and wealth signaling.

Keywords: Art as investment, investor credulity, masterpiece performance, role of experts

JEL Classification: G12, G14, Z10