Does it pay to invest in art? Returns in fine art have been overestimated

Investors should buy paintings if they like looking at them, but not to make money, according to new research. Prof. Roman Kräussl (University of Luxembourg), Arthur Korteweg (Assistant Professor at Marshall School of Business, University of Southern California) and Prof. Patrick Verwijmeren (Erasmus School of Economics, Erasmus University Rotterdam) have found that returns are in fact much lower.

Art has emerged as a new asset class for well-diversified portfolios, with the index of fine art sales, which is used by art advisors to sell art funds, showing an average annual return of 10 per cent over the past four decades. According to the study, the underlying cause of the overestimation of returns and underestimation of risk is what is known as selection bias. In the art market, selection bias occurs, for example, because paintings in high demand go to auction more frequently and sell at higher prices, causing them to be biased upwards. Additionally, owners tend to sell the paintings that have increased in value the most since the time of purchase. Indices then use data from the sales of these above-average paintings to valuate the paintings that never sell of sell less frequently.

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