The Value of Art

A common topic of interest in the field of arts economics is that of art as an investment.  For a great survey on issues regarding art prices, returns, and, in turn, investment potential, see “Art Auctions” by Orley Ashenfelter and Kathryn Graddy in the Handbook of Economics of Art and Culture.

Among the many things this article covers is the topic of finding the value of art (in terms of prices), with the end goal of considering art returns, and how the auction process informs price formation.

When we think about valuing a piece of art (in this case, finding the price one should pay for ownership of that work), we could think of it as we do more “traditional assets.”  Thus, we could think of “comparable” works that have been involved in “past transactions” that would allow us to get an estimate for the value of the piece in question. Alternatively, one can conduct a valuation for a piece inspired by a type of discounted cash flow method. In other words, one could evaluate the kind of “cash flows” one would obtain from a given painting (and here, “cash flow” can be abstracted heavily to “value” in general—both monetary, cultural, and otherwise) and the risk involved with owning that painting, essentially valuing the piece of art as the sum of the discounted value you’d obtain in future time periods from that work.

Now, thinking of art valuation less traditionally, one can think of what is known as a hedonic model. This model, very simply, regresses observed prices on characteristics of the respective works. In short, it would give coefficients on different features of a piece of work. In this case, one would preferably estimate different models for different mediums, since different characteristics can have different impacts on the value of a painting based on the type of work—one can imagine that a dark red color would have a much more positive impact on a painting than on a marble statue. In turn, simply adding a dummy variable for different mediums to a regression that encompasses different kinds of arts may not result in correct coefficients (we can also think about the impact this could have on the standard errors of these coefficients, if perhaps some mediums have more widely dispersed price observations for the same variables than other mediums).

The way that a hedonic model would be applied then (if these models were to be used predictively or prescriptively—which both philosophically and economically may involve some issues) would be to input the value of the variables for each work in consideration to output an estimated price for that work. In short, an appraiser would add up the sums of the “values” of each characteristic of the work to reach the piece’s final value.

Of course, a hedonic model based on panel data could be adapted to a fixed effects model in order to control for the different perceived values of “quality” of each painting. In theory, though, paintings with identical values of the dependent variables should, by the definition of this model, have identical “quality”, a question that brings us quickly to the more transcendent and literally “price”-less dimensions of art. After all, what defines “quality,” and shouldn’t by definition the coefficients of the model capture it by defining the “value” or quality of a work given its characteristics? Why are some paintings that are objectively similar to others worth much more (or treated as much more higher-quality) than others?

Alternatively, another regression model to value art would be the repeat-sales model, which is frequently used in another “alternative” asset class: real-estate. This model is perhaps better suited to construct indices of art prices overall, as opposed to valuing individual pieces of art. It controls for the mix of art products being considered (in short, the quality of the works of art in given times) by only considering works that have been sold more than once (an index that does not do this could perceive an increase in the “price of art” that is actually only capturing the entry of new, high-quality or fashionable pieces of art that, because of their quality, would be increasing the index).

Of course, an issue endemic to the repeat-sales model (and generally most regression models observing prices at sale) is that of survivorship bias: a model may be overestimating prices of art because it only observes those pieces that were in fact sold (meaning, those that have “survived” in the market). By definition, a model that only looks at sales would not be accounting for the multitude of art pieces that failed to sell, so coefficients would likely be overestimated given this bias.

And of course, an even broader issue with valuing art is the major philosophical question:  can we even put a price on art? Clearly, auction houses, galleries, dealers, and independent artists have been putting price tags on their work, and this is mostly for good reason. Artists (and the market around them) deserve to make a living off of their labor and the value they add to culture and society.  So, of course, art should never really be “free”: it always adds some value. However, art can in many occasions be “priceless.” And this is where the major issue arises: will art valuation ever truly systematically, consistently, and accurately capture all the value an art piece offers to the world? More deeply, how can we even calculate the value an artwork provides? Beauty (and I use this term very generally, to encompass all forms and styles of “beauty”, including the grotesque and ugly, the conceptual and the performative), after all, is in the eye of the beholder. What kind of factors should we include and, by attempting to run models and quantify values are we not imposing a norm on what actually “counts” to price a piece of art?

Why should we limit and define the characteristics that have value to us humans when, often, art is transcendental and beyond the features we can visually discern (or perceive with different senses)? And who’s to say our calculated values should apply to all (or on that note, any) piece of art? That a blue is worth more than a red? Or a larger frame more than a smaller canvas? That a painting’s exposition in the Met or its more prestigious provenance or artist makes it a more “valuable” painting than the one by your grandfather, sitting over the mantle at home? These and many questions, like art itself, are perhaps beyond the limiting interpretations and assumptions of the human mind.