Priceonomics

In 1996, an art dealer named Glafira Rosales approached Ann Freedman, the president of New York’s Knoedler Gallery, which sold artwork to wealthy collectors for over 150 years. Rosales offered to sell Knoedler paintings by masters like Mark Rothko, Jackson Pollock and Willem de Kooning at bargain prices—under one million dollars each. 

She told Freedman that an anonymous collector—a family friend—inherited the paintings and recently rediscovered them. For over a decade, the gallery resold the pieces for millions and stored its files on the acquired works under the label “Secret Santa.” Pushed for more details about the mysterious collector by employees, Rosales replied, “Don’t kill the goose that’s laying the golden egg.” 

Fifteen years after Roales first approached Knoedler, a Belgian hedge fund manager named Pierre Lagrange received bad news. A consultant that he hired to investigate the authenticity of a $17 million Jackson Pollock painting he bought from the gallery discovered a pigment of paint that was not sold commercially during Pollock’s lifetime. When Lagrange emailed Knoedler, the gallery closed. Within a year, several other customers joined him in claiming that their multimillion dollar purchases were “worthless fakes.” In 2013, Rosales pled guilty in a $80 million forgery case.

The case of these forged masterworks highlights just how difficult it is to pin down the source of art’s financial value. Until Lagrange complained, the paintings were worth millions, praised as masterpieces, and exhibited to appreciative audiences. The revelation of the real artist as  Pei-Shen Qian—a 73-year-old Chinese immigrant who painted the forgeries from his garage in Queens for a few thousand dollars each—rendered them instantly worthless. Yet the paintings’ appearance did not change. An artwork’s aesthetics, the feelings it conveys, and anything else that derives from its physical appearance may influence its price, but as Qian’s paintings demonstrate, they cannot explain its extraordinary value.

This points to an important if unromantic truth: Brands are king in fine art. Names like Rothko and Pollock distinguish them from unknown artists the same way the Coke and Pepsi brands distinguish them from other sugar water. Qian painted attractive works in the style of famous artists, yet attaching the names Rothko and Pollock to them increased their value by millions of dollars.  

One reason wealthy individuals spend millions collecting fine art is that brands like Picasso and Monet have staying power. Buying a million dollar painting at Sotheby’s is not like buying a Lamborghini. A car’s value falls as soon as it’s driven off the lot; a Picasso painting typically retains its value and even appreciates over time. 

But amidst the uncertainty of subjective taste, how does an artist establishes herself as a million dollar brand? How can a Manhattan socialite buy a $100,000 abstract painting by an emerging artist without fearing that it will be a tacky, $250 wall decoration in a few years? In other words, how does paint on canvas become expensive?

The answer is that the market for fine art is heavily “curated.” It is controlled by galleries and dealers who commit with astonishing discipline to keeping artwork prices predictable and pegged to signals of quality like the prestigiousness of the gallery selling the artist’s work. You could say the market for art is “rigged”; a more charitable explanation is that galleries and dealers act as tastemakers, deciding which art is good and therefore expensive. The end result is to turn artists into brands, which introduces enough certainty for the market to function.

The Artist as an Asset Class 

During record breaking art auctions at Christie’s and Sotheby’s, the amount of money spent often exceeds the gross domestic product of small island nations. As an outsider, it’s hard to see results like Christie’s $745 million contemporary art auction in May of 2013 as anything other than a pissing contest of conspicuous consumption. Yet insiders in the art market describe these purchases as investments.

If anyone has reason to be skeptical of the enormous sums paid for fine art, Filippo Guerrini-Maraldi ranks among them. As the Executive Director and Head of the Fine Art Team at R.K. Harrison Insurance Services, Guerrini-Maraldi insures art collections worth millions of dollars, a sum for which R.K. Harrison’s insurance brokers are liable. Yet the team never declines to insure, say, a pleasant painting of four rectangles at a six-figure price tag. “If I am asked to insure a work of art that someone bought from a dealer or auction house,” Guerrini-Maraldi tells us, “who am I to say, ‘You paid too much mate?’”

R.K. Harrison can usually insure works for the value the client cites because fine art has held its value over time. While conceding that there are “heavily inflated prices for works of art” as certain artists or periods come in vogue, Guerrini-Maraldi notes that “there are corrections, just like with stock market bubbles.” This stability has been endorsed by the financial sector, which accepts art collections as collateral.

“The idea that art is an asset class and that certain objects by certain artists retain their value,” says Jonathan Binstock, who has a doctorate in art history and helps clients assemble art collections as part of Citi Private Bank’s Art Advisory service, “is something people around the world have come to agree upon.” As William Fleischer, owner of Bernard Fleischer & Sons, another art insurance company, points out to us, it’s really no different than the high prices people pay for collectibles ranging from comic books to antique toothpick holders.

The consensus on fine art’s value is also a data-driven conclusion. Binstock notes that between art databases of auction sale results, which date back to the eighties, and published volumes that go back even further, there is “a lot of history to justify the price one might have to pay” for an expensive artwork. Any number of favorable analyses chart the prices of pieces by renowned artists like Andy Warhol. Despite a rapid rise and fall in price during exuberant periods like the 2008 fine art bubble, they outperform the stock market over several decades.

So how do professionals evaluate an artwork’s worth? According to Sara Friedlander, who organizes art auctions at Christie’s, the world’s largest auction house, “There is not one art market. Every artist has his or her own market.” Christie’s predicts auction prices by looking at “comparables in the market,” which except in the case of real outliers or a rare masterpiece, means the selling price of a similar work by the same artist. 

Photo by Adrian Grycuk

In one sense, this demonstrates how artwork maintains its diversity despite its commodification; there is a near infinite supply of art, but a limited supply of Van Gogh paintings. In another sense, this gets at how the overwhelming factor underlying the price of an artwork is the artist’s brand. The art world refers to buying “a Pollock” or “a Warhol” because those artists are brands. The contemporary art market is more like the music scene of 50 years ago, which celebrated the full albums of a select few bands, than the music scene today, which more often celebrates a few singles by a wider array of bands. 

Critics are less sanguine about investing in Warhols, Rothkos, and Richters. In The Supermodel and the Brillo Box, economist Don Thompson writes that positive headlines about the sums fetched at auction by fine art ignore when those works sold at a higher price years earlier. As the Financial Times notes, Thompson’s book fits into a string of recent commentary that “points out the huge pitfalls of buying art for investment: sky-high levels of risk, illiquidity, and a fashion-driven nature that can see last year’s ‘in’ artists fail even to be accepted for resale by the big auction houses.” 

That doesn’t necessarily mean the perception of fine art as an investment is a mirage. The possibility that the work of a young artist will shoot up in price from $10,000 to $100,000 appeals to speculators and entails risk. A Gerhard Richter piece is like a blue chip stock; a work by a fashionable young artist more like funding a startup. Many startups fail; some blue chip stocks turn out to be Enron. Picking individual stocks has always been a risky, high variance strategy rather than prudent investing. Yet that has not kept wealthy investors away.

William Fleischer says that some collectors he insures “store art in warehouses, purely for the investment.” Flipping art happens; the fastest growing product at Artnet, which publishes market research on fine art, is its online auctions that “offer quick transactions at low costs.” But especially at the top of the market, financial returns are a secondary concern.

Jonathan Binstock advises some of the world’s top collectors from his post at Citi Private Bank, yet neither he nor any of his colleagues are bankers. He describes their role as helping clients assemble collections that are “culturally significant and more valuable than the sum total of prices paid.” Personal preferences matter as much or more than return on investment. Their clients don’t “buy a painting for $5 million because we think it will be worth 2% more in 3 years,” he says. “And they rarely sell” the artwork they acquire.

Art is not the most sound investment, but it pays incredible dividends in the form of social cachet. As Don Thompson notes, every newspaper covered Leon Black’s purchase of Edvard Munch’s “The Scream” for $120 million. If Black had bought a “moderately impressive yacht” for the same amount, he would have garnered almost no publicity at all. Top collectors enjoy preferential access to famous artwork, and seating charts at art fairs and auctions carefully reflect a collector’s status. Collectors buy an experience and social standing as much as an expensive product. Jackson Pollock paintings essentially serve as the admissions ticket to one of the world’s wealthiest and most exclusive clubs. Christie’s estimates the market for artwork priced over $20 million at roughly 150 collectors.

According to Sara Friedlander, who organizes auctions at Christie’s, “since the earliest days of the Renaissance, art has been a way to enter into certain social circles. That’s a good thing.” Whether spending $10,000 or $50 million, she says, collectors can interact with artists and support the arts like Renaissance Italy’s Medici family. More cynically, lending Picassos to exhibits and donating millions to museums also allows heirs, hedge fund traders, and Fortune 500 executives to enjoy fawning coverage as cultured patrons of the arts.

A final reason people buy heinously expensive art? “After you have a fourth home and a G5 jet,” one wealthy collector told Sarah Thornton, author of Seven Days In The Art World, “what else is there?”

Are Masterpieces Special?

If you ask anyone in the world to name a famous painting, by far the most common response will be the Mona Lisa. Art historians have offered many explanations for its signature status. The Louvre website cites, among others, the subject’s enigmatic smile and novel features like its three-quarters pose. But in an article for Intelligent Life, journalist Ian Leslie suggests an alternative explanation: that the Mona Lisa’s ascension to the top of the art world, like that of any artwork, was a historical accident.

Despite its fame, the Mona Lisa has a surprisingly sleepy history. “In the 1850s, Leonardo da Vinci was considered no match for giants of Renaissance art like Titian and Raphael,” Leslie writes, “whose works were worth almost ten times as much as the ‘Mona Lisa.’” The Mona Lisa hung in the Louvre, but it did not attract crowds. That changed in 1911, when a museum employee hid in a closet overnight and walked out the next day with the Mona Lisa hidden under an artist’s frock. Suddenly the Mona Lisa was front page news around the world. When the thief was arrested, it fed a media spectacle around his trial, as the Italian native defended his theft as a patriotic act.

Within psychology departments, it is well established that familiarity breeds likeability. Psychologist James Cutting believes this “mere-exposure effect” explains why we celebrate some paintings over others. In an experiment, he showed undergraduates a slideshow of Impressionist paintings. A control group liked the paintings that filled art history textbooks; students shown comparable yet unheralded works four times as often as the famous paintings preferred the unheralded works. Following this logic, we can see how coverage of the Mona Lisa theft made its reputation—and how each masterpiece may owe its status to historical accidents. Leslie writes:

The most reproduced works of impressionism today tend to have been bought by five or six wealthy and influential collectors in the late 19th century. The preferences of these men bestowed prestige on certain works, which made the works more likely to be hung in galleries and printed in anthologies. The kudos cascaded down the years, gaining momentum from mere exposure as it did so. The more people were exposed to, say, “Bal du Moulin de la Galette”, the more they liked it, and the more they liked it, the more it appeared in books, on posters and in big exhibitions. Meanwhile, academics and critics created sophisticated justifications for its pre-eminence. 

Other circumstances external to an artwork also impact its status in the art world. One reason we celebrate certain works and artists is their contribution to artistic movements. “The Fountain” is just a urinal placed upside down and signed, but it defined the Dada movement’s challenge to artistic sensibilities, which is why an authorized copy of the artwork (the original was lost) sold for $1.8 million in 1999. 

Yet this meaning is an ever-changing judgment. According to Jonathan Binstock of Citi Private Bank, Piero della Francesca, an early Renaissance painter, was “out of favor for a long time.” When surrealists like Salvador Dali began to use his artwork as inspiration, however, museums recognized him as a precedent for an influential art movement. “Now he’s everybody’s favorite,” say Binstock. When we say artwork has value, really we value the social meaning we ascribe to it: transient characteristics like its current meaning within the artistic canon, contemporary attitudes about art, and the favorability built up over time by its ubiquity. 

While this casts some doubt on our celebration of select masterpieces, it does not mean that artistic intentions and craftsmanship play no role. In his article, Leslie points to another experiment that mimicked Cutter’s setup, but included paintings by Thomas Kinkade, the “gold standard for bad art.” Just as any number of good movies can endear themselves over many viewings, but watching a bad movie only makes you hate it more, the students disliked Kinkade the more they saw his work.

The beneficiaries of these historical accidents—the Mona Lisas and the Guernicas, the da Vincis and the Picassos—are highly valued by the art market. Yet the artists that monopolize record setting auctions represent a tiny portion of the market—around forty artists, according to Jonathan Binstock. 

Collectors confidently shell out for artists who dominate art history textbooks. But what about young artists? Or deceased artists whom the art world is still deciding whether to anoint as an influential master or leave as a footnote? How exactly does canvas and paint become expensive art? 

The First Rule of Art Collection

When Daniel Radcliffe—who has established himself as a contemporary art collector with the riches he earned from the Harry Potter films—attended the Frieze Art Fair, he set his sights on a work by conceptual artist Jim Hodges. The wealthy actor was good for the money, but he discovered that an ability to pay does not easily translate to the ability to buy art. The dealer told Radcliffe that he was “waiting for a more prestigious collector” to buy the work. Radcliffe only managed to buy the painting after the artist personally lobbied the dealer.

When you ask industry insiders about fine art prices, they attribute them to supply and demand. “It’s a market like any other,” we heard again and again. Yet that is not exactly accurate. When shopping for luxury goods, customers often equate price with quality. This is particularly true in the fine art market, where the diversity of offerings and vagaries of taste make consensus about value impossible to achieve without the signalling quality of brands. No one considers a painting selling for lower than expected a fortuitous discount; they perceive it as a sign that the artist was overhyped and overpriced. 

As a result, art galleries exercise a level of control over prices that, as economist Allison Schrager writes in Quartz, “would be illegal in most industries.” In this way, artists’ work gets singled out and begins to enjoy the compounding benefits of the mere exposure effect. It’s not exactly a “historical accident,” as Leslie describes it, but part of a carefully orchestrated process that elevates artists into established brands.

The majority of new artwork is sold at galleries, and artists often sell their artwork through a single gallery, which represents the artist and typically takes a 50% commission on each sale. Galleries use their position as the pipeline of new artwork to establish a certain level of price stability in the fine art market, without which it would be too risky for millionaires to drop big money on anything but fully established artists like Rothko.

Galleries do this is by refusing to drop the price of any artwork. Galleries have their own reputation for dealing work at a certain price point; to protect the prestige of the gallery and their artists, they will drop an artist whose work fails to sell rather than reduce the price. So within the gallery, at least, the price of a painting never drops. Instead artists whose work doesn’t sell just fade away.

But galleries are equally worried about a piece by one of their artists quickly selling at a high price—especially it they won’t receive a commission for the sale—since any downward trend in price later on tarnishes an artist’s brand. So gallerists maintain control over prices by dealing with trusted clients who only sell through the gallery and at its prices. They do this through the use of both carrots (galleries offer loyal collectors preferred access to their best offerings) and sticks (galleries may stop selling to collectors who resell their inventory on the secondary market). Allison Schrager offers the following anecdote about a collector offered enough money for a painting by a celebrity that “she’d never have to work again”: 

She explained that she would not bargain with [the celebrity]—any resale of the painting must go through the gallery, so [the gallery would] get a commission and select the price—not her. The young collector knew there would be consequences to making the sale. She may have owned the painting, but reselling it at a profit without the gallery’s permission would blackball her from the art industry. To her, that was not worth the millions she was offered. 

Galleries want their artists to succeed and the price of their artwork to increase. They just need to make sure it happens in lockstep with validating critical reception. So in addition to introducing artists to the right people and getting them studio time, galleries make an exception to the practice of never dropping an artist’s price for particularly influential collectors or museums, who receive preferred access to artwork, since that boosts an artist’s standing.

Auction houses are a threat to this system, as they weaken galleries’ control over prices and commissions. One employee at an auction house who chose to remain anonymous conceded that tension exists between galleries and auction houses. Although he believes auctions play an important role in driving up the price point for artists’ work, gallerists dislike seeing art at the whims of the market. When artwork does hit the secondary market, galleries attend the auction and, if necessary, bid on their artist’s work to make sure its price does not fall. “I call it support bidding,” Guerrini-Maraldi tells us. “It happens a lot when people want to protect their portfolio or interest in the artist.” Like a gallery with a vested interest, someone who has many Picassos, for example, may bid up the price to maintain the value of his own collection. 

Although they submit artwork to the forces of supply and demand, auction houses intervene to ensure that the market is gentle. To reassure sellers, Christie’s and Sotheby’s commonly guarantee that they will not sell a work below a minimum “reserve price.” Sensitive to the brand damage caused by a painting failing to sell, when no one bids above the reserve price, auctioneers may pretend to spot a high bid in the back, slam their hammer down, and yell “Sold!”. 

Another common auction house tactic is to “bid off the chandelier” by calling out a few nonexistent bids to start the bidding. Auction houses also prime markets by showcasing works of an artist up for sale at exhibits around the world—seemingly grasping the power of mere exposure. Even more deceptively, as the New York Times notes, “collectors can find themselves being bid up by someone who, in exchange for agreeing in advance to pay a set amount for a work, is promised a cut of anything that exceeds that price.” This inflates prices through false competition.

The art market is the largest unregulated market in the world,” Filippo Guerrini-Maraldi reflects during our conversation, echoing a common refrain on the world of galleries and posh auction houses. “There are very few rules. People can behave in extraordinary ways.”

Life as a Brand

Investigating the fine art market reveals that millionaires’ conspicuous consumption strongly influences which art gets elevated and celebrated over others. In its defense, the Renaissance model of a few rich families acting as artistic patrons is often praised. Galleries characterize their actions as in the best interest of artists, and the auction employee we spoke to praised their role as “real visionaries who select this roster where we can really feel that this artist is in the same program as the estate of Pablo Picasso.” Sure, galleries are brand managers, but they can also be seen as the equivalent of museum curators. 

At the same time, the auction employee admires the more democratic aspect of public purchases on the secondary market, where artwork can speak for itself. Ultimately, price manipulation semi-arbitrarily turns a select few artists into lucrative brands and status symbols. As one art dealer admits, "sometimes you can get an equally attractive work on the street, for a fraction of the price, but you miss the investment value and social prestige of building a collection." 

Yet it’s also important to remember that while galleries and auction houses control the money spigot, they don’t exercise sole control over critical taste. Citi Private Bank’s Jonathan Binstock describes the relationship between the market and museums as a two-way street. He notes that “there are younger artists who gain a lot of traction in the market and, at least in part for this reason, museums begin to take notice and give them extra consideration.” Binstock also mentions artists whose prices inflated during a craze for a certain style in the 1980s, then returned to earth once the market moved on. And alternatives to the gallery model—like selling directly to customers online or through nonprofit spaces—allow artists to fund their work without adhering to the taste and control of traditional galleries.

Money does influence art. Paintings that look good on the walls of Manhattan apartments sell more easily, and in a complete violation of supply and demand, since exposure and evidence of successful sales boost prices, the market rewards prolificness over spending years on a few masterpieces. But no amount of intervention can indefinitely prop up the price of a work that museum curators shun. Emma Webster, a young artist with whom we discussed the financial side of art after a showing in San Francisco, tells us, “It’s impossible to make art for the market. Artists that try to cling to fads are easy to find and disregard.” 

Emma Webster in studio

Still, the fine art market plays a large role in defining which art is important. And as a result, so too do the heirs and hedge fund managers that supply the money. As the Mona Lisa anecdote suggests, which artworks get singled out as masterpieces may always be partly arbitrary. But the legacy of money doing the picking leads to one of the least attractive aspects of the fine art world: the mysterious aura surrounding renowned artists and artwork that makes museum visitors who don’t like or “get” a masterpiece feel anxious or resent the art world. 

Although it is the opinion of one artist, Webster believes that the public should not blame artists for the cult of personality that surrounds artists. “Famous artists do not create the aura,” Webster says. “It is the gallery, promoter, critic, and buyer, all of whom are more willing to uphold these pillars of pretension so that their investments can maintain power.” When the art world buys and sells paintings for extravagant amounts of money, those paintings can’t be simple. Expensive art demands gilded justifications for its price tag and packaging in layers of obfuscation. This benefits artists whose work sells for hundreds of thousands or millions of dollars. But it comes at the cost of alienating the public from the art world.

For our next post, we investigate a century of debates over pie charts. To get notified when we post it →  join our email list.

This post was written by Alex Mayyasi.  You can follow him on Twitter at @amayyasi

The lead image in this post is by E. Hildrew



Woah. We are flattered you shared our blog post!

If you want to be notified when we write a "halfway decent" blog post in the future, leave your email here below.