Selection Bias In Art Is What Creates Value

The Wall Street Journal jumps on the selection bias bandwagon repeating the now well-covered research on why art is not a viable asset. But there’s another way to view this work. Art as a broad category is not an investment because most artists’ work never becomes valuable. The money paid to a gallery is for the artist’s time, effort and talent, not for the object’s ongoing value as a piece of cultural currency.

Though a work of art may easily fall into or out of the real of cultural currency over time—there are many once-valuable artists whose works are no longer sought after—the “selection bias” does represent a narrower subset of cultural objects that have retained value and have the potential to retain value:

The underlying cause of the overstated returns is something called “selection bias,” which Mr. Korteweg says is endemic to indexes built on repeat sales of relatively illiquid assets not sold at random.

Simply put, some of the paintings in the index changed hands more frequently than others in the index. The more a painting appreciated, the more likely it was to trade, creating a sharp upward bias for the index.

After accounting for this sample-selection problem, the researchers determined that a more representative return for the universe of paintings was only 6.5%.

Their conclusion: “Our results show that investors should optimally forego investing in paintings, even without considering transaction and insurance costs, and the risks of forgeries, theft and physical damage, unless they are able to pick winners or there is substantial non-monetary utility from owning and enjoying art.”

Art Imitates Life but Not the S&P (WSJ)