Art as an Investment and Conspicuous Consumption Good

Abstract

This paper provides a simple and empirically plausible model of artworks as investment vehicles. It reconciles the observation that average financial returns for collectibles are low and volatile with the theory of consumption-based asset pricing. Art assets are appealing both for their ability to transfer consumption over time and for their use as signals of wealth, as in the literature on the demand for luxuries. Adding art value to utility, returns also reflect this "conspicuous consumption" dividend; as a result, average financial returns are low. Risk premia for artworks are predicted to be modest or even negative. (JEL G11, Z11)

Art investment in South Africa: Portfolio diversification and art market efficiency

“…Art is a hybrid of consumption and investment (Mandel, 2009(Mandel, :1657, which makes it difficult to compare the return on standard financial assets to the return on art, since the difference in return may be capturing the value that the owner receives from owning an asset that is also a consumption good (Throsby, 1994:6).…”

“…People that purchase art fall into three categories or motives in terms of their purchasing decisions: intrinsic motives (the derivation of aesthetic value from the artwork); as a signal of wealth; for investment purposes; or some combination of these (Mandel, 2009(Mandel, :1653. With reference to intrinsic value, it is difficult to predict varying taste and therefore consumption decisions.…”

“…The income and wealth of the person who desires the artwork would be the only constraint to the consumption decision (Goetzmann, 1993(Goetzmann, :1375. Art as a signal of wealth suggests that demand could be seen as a form of conspicuous consumption, or to create a sense of cultural accomplishment through the purchase of artworks, which means that the purchase of the artwork has nothing to do with the intrinsic value of that good (Mandel, 2009(Mandel, :1656Shipman, 2004:279;Braun & Wicklund, 1989:162). Art purchasing may thus not always conform to consumption theory, which assumes a fully informed and rational economic agent.…”

“…However, the way that artworks derive their value is different to other financial investments as art is a durable consumption good as well. Mandel (2009Mandel ( :1654 states that the demand for an artwork as a financial asset will fulfil the need for savings while also proposing that art carries a "utility dividend" which increases the value of art as an asset. Stocks represent a claim on the asset that provides a monetary return to the owner over a period, while an artwork provides a monetary return at the end of the ownership period as well as providing aesthetic value and social prestige to its owner (Goetzmann, 1993(Goetzmann, :1375.…”

“…Art, on the other hand has very little intrinsic value and its value can change depending on individuals' preferences (Goetzmann, Renneboog, & Spaenjers, 2009:2). In addition to being an investment, art may also have a consumption value component in the form of a "utility dividend" -the pleasure, and perhaps prestige, that is derived from art ownership (Mandel, 2009). Frey and Eichenberger (1995) argue that media reports have given the impression that art investment offers high returns.…”