Economics and Art

Jun 24, 2015

Last month, Pablo Picasso’s Women of Algiers painting set a record for being the most expensive art piece sold at auction. With a price tag of over $179 million, what’s most surprising about the news of this high-priced sale is that art dealers expect the prices of pieces like this one to keep increasing. On the other hand, many in the art world balk at the concept of art valuation saying that artistic success is not tied to market success. These conflicting ideas suggest that, in the unique world of art, the economic concepts of irrationality and investment play out in real debate.

In traditional economics theory, people are assumed to behave rationally, meaning they act in a way that maximizes utility – or, happiness. Those who act irrationally, in an economic sense, make choices that may not maximize their utility and are, thus, not acting in their economic best interests. In particular, behavioral economists, who study the connection between rational and irrational behavior, suggest the possibility of irrational rationality and predictable irrationality wherein people behave somewhat irrationally in terms of their economic outcome, because their decisions consider other non-economic forces like bias, political views, or religious beliefs.

In the case of art, spending extremely large sums, perhaps over what dealers consider market value, might be considered irrational behavior. After all, that money could go toward buying an investment with much higher and actual future returns, such as a rental property, mutual fund, or business opportunity. But for some savvy buyers, art is the investment. For example, the seller of the Picasso painting certainly received a large return on their investment, as the painting was last on the market in 1997 when it sold for $31.9 million. In fact, a recent study of paintings sold at auction from Sotheby’s and Christie’s found that American paintings yielded an average annual nominal return of 12.2 percent from 1950-2000, just below the S&P’s average of 12.6 percent during that same period.

People will continue to buy art, and even to spend millions on it. And to economists it will remain largely unclear whether they do so simply to profit from their investment by reselling at a future date or for their own personal reasons or “rationalities," perhaps to simply decorate a space, to enjoy a piece’s beauty and meaning, or for the simple satisfaction of owning something extremely rare and valuable.

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