Underperformance of Masterpieces

A common advice given to their clients by art dealers is to buy the best (most expensive) artworks they can afford. This presumes that masterpieces of well known artists will outperform the market. In other words, masterpieces might have a higher expected return than middle-level and lower-level works of art.

Contrary to established industry wisdom, our results on the performance of masterpieces suggest that investors should not be obsessive with masterpieces and they need to guard against overbidding. We like to note, however, our results may only serve as a benchmark for those artworks bought at major auction houses. Our return estimates could also be biased due to sample selection. In addition, art may be appropriate for long-term investment only so that the transaction costs can be spread over many years.

Our research has left many interesting issues. First, is there a systematic bias in bidding prices so that winning bids tend to exceed value? In this paper, we have not provided any evidence on the presence of overbidding. While the true value of art is unobservable, one may wonder if there is an alternative proxy to value, such as dealer’s estimates, that may serve as a proxy so that we may measure the presence of market wide bias in art auctions. Second, while our study has provided some cross-sectional evidence on the mean reversion of art returns, one may wonder if similar time series evidence can be found on the market as a whole so that times of great exuberance are also more likely to be followed by times of disappointing performance.

To put it differently, it will be interesting to know whether the art market itself may also follow a mean reversion process. We will leave these for future research.