tag:theconversation.com,2011:/id/topics/auction-23250/articlesAuction – The Conversation2021-03-04T00:31:25Ztag:theconversation.com,2011:article/1563712021-03-04T00:31:25Z2021-03-04T00:31:25ZWhy the competitive spirit can take over in auctions — and how you can stay in control<figure><img src="https://images.theconversation.com/files/387409/original/file-20210303-23-16xkfui.jpg?ixlib=rb-1.1.0&rect=0%2C14%2C4912%2C3242&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p>Despite the pandemic, Australia is in the midst of a hugely competitive auction market. Sydney, in particular, is experiencing dizzying <a href="https://www.domain.com.au/news/sydney-auction-clearance-rate-hits-highest-point-in-24-years-1023828/">auction clearance rates</a> and the Reserve Bank’s decision this week to <a href="https://www.rba.gov.au/media-releases/2021/mr-21-03.html">keep interest rates extraordinarily low</a> will no doubt keep auctioneers busy.</p>
<p>If you’ve ever taken part in an auction, you’ll know <a href="https://aisel.aisnet.org/jais/vol16/iss10/2/">emotions can run high</a>, and sometimes drive us to bid more than originally intended. </p>
<p>Our paper, published in the journal <a href="https://cognitiveresearchjournal.springeropen.com/articles/10.1186/s41235-020-00259-w">Cognitive Research: Principles and Implications</a>, found the way auctions are designed and run can vastly increase competitive arousal in bidders.</p>
<p>That’s obviously valuable information for sellers. But if you’re a buyer, the good news is there’s a lot you can do to ensure your competitive spirit doesn’t leave you with a bad case of buyer’s remorse.</p>
<p>To see just how far people were willing to go to win, we studied people’s behaviour in one of the most competitive bidding environments possible: a Dutch auction.</p>
<h2>What is a Dutch auction?</h2>
<p><a href="https://www.investopedia.com/terms/d/dutchauction.asp">Dutch auctions</a> are a special auction format where the price starts unrealistically high and then comes down in increments and the first person to bid wins.</p>
<p>Originating in the Netherlands for the rapid sale of perishable goods such as flowers, these auctions are fast, exciting and ultra-competitive. Bidders put everything on the line with the timing of a single bid.</p>
<p>Bidders must trade-off between certainty and price: bid early to secure the item and you pay top dollar; bid later at a lower price and you risk losing to another bidder.</p>
<p>Dutch auctions run this way are not common in the <a href="https://www.abc.net.au/news/2018-04-04/dutch-auctions-a-grey-area-in-real-estate-industry/9614392">Australian property market</a>, but by studying how people behave in them we can learn a bit about how competitive spirit influences decision-making in other settings.</p>
<p>A strong sense of competitive spirit may be a <a href="https://www.psychologytoday.com/us/comment/887180#comment-887180">human trait</a> honed by years of evolution, but in a heightened competitive environment you may become more willing to take risks you otherwise would not.</p>
<p>You might find your focus drifting toward a different (and possibly dangerous) form of motivation — the desire to win at all costs.</p>
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<a href="https://images.theconversation.com/files/387412/original/file-20210303-21-l7ataw.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="A woman looks disappointed while holding her phone." src="https://images.theconversation.com/files/387412/original/file-20210303-21-l7ataw.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/387412/original/file-20210303-21-l7ataw.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/387412/original/file-20210303-21-l7ataw.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/387412/original/file-20210303-21-l7ataw.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/387412/original/file-20210303-21-l7ataw.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/387412/original/file-20210303-21-l7ataw.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/387412/original/file-20210303-21-l7ataw.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="caption">Who among us has not bid too much on eBay and then regretted it when we won?</span>
<span class="attribution"><span class="source">Shutterstock</span></span>
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<h2>Burning through the budget</h2>
<p>Our recent study looked at people’s bidding behaviours during a series of simulated Dutch auctions where we asked participants to imagine being managers of a warehouse.</p>
<p>They were asked to bid against their competitors to buy goods and fill up their warehouse, while staying within their allocated budget.</p>
<p>By bidding early, they stood a better chance of filling up their warehouse quickly but risked paying too much for the goods and running out of money before the warehouse was full. Wait too long and they risked losing the chance to buy stock at all, and watching it go into their competitors’ rapidly-filling warehouses.</p>
<p>In this tense environment, we found people were willing to sacrifice a better long term financial outcome for the sake of simply beating their competitors. In other words, they often burned through their budget too quickly just to “win”.</p>
<p>People initially made well placed and reasonably priced bids early in the auction series.</p>
<p>As the auctions continued, however, we watched participants place bids that unnecessarily, and perhaps irrationally, drained their budget for the sake of a short term victory.</p>
<h2>Three ways to win without losing in the long term</h2>
<p>Our study helps shed light on bidder behaviour in lots of markets, whether it is property, eBay, auction houses or any setting where the competitive spirit can take hold.</p>
<p>If you’re attending an auction, and don’t want to be a winner who loses in the long term, here are three ways to avoid falling victim to your own competitive spirit:</p>
<ol>
<li><p>be aware that your decisions when in “competition mode” can push you past your budget. Separating the emotion from the decision can help minimise your risk of overspending.</p></li>
<li><p>set your spending limit before you start and know when to stop. Our findings suggest that competition can easily drag us past that point. While winning is nice, it can also be a curse.</p></li>
<li><p>give a friend your budget and have them bid for you. Beware their sporting nature, though; they might also be tempted by the thrill of victory.</p></li>
</ol><img src="https://counter.theconversation.com/content/156371/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Murray Bennett's research is supported by a federal government Research Training Program (RTP) stipend scholarship.
</span></em></p>To see just how far people were willing to go to win, we studied people’s behaviour in one of the most competitive bidding environments possible: a Dutch auction.Murray Bennett, PhD candidate, University of NewcastleLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/880262017-11-29T13:58:48Z2017-11-29T13:58:48ZNew law will stop abuse of South African home owners who default<figure><img src="https://images.theconversation.com/files/196305/original/file-20171124-21853-nu776w.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p>There are few things as devastating as losing your home because you cannot pay your debt. But if this cannot be avoided, you’d certainly prefer that your property is sold for the best price possible. Then you can hopefully settle your debts and perhaps have enough money left to start over with. </p>
<p>This ideal should now become a stronger possibility for South Africans who struggle to pay back their home loans. A new <a href="http://www.gpwonline.co.za/Gazettes/Gazettes/41257_17-11_NationalRegulation.pdf">law</a>, which is due to come into effect shortly, will for the first time enable courts to set a “reserve price” (minimum price) at which the residential property of a defaulting owner should be auctioned off. </p>
<p>Until now many South Africans have lost their properties to speculators who snap them up at prices that are far below market value. But to sell someone’s home for an unreasonably low price is a <a href="https://www.academia.edu/25083464/R_Brits_Sale_in_execution_of_property_at_unreasonably_low_price_indicates_abuse_of_process_Nxazonke_v_ABSA_Bank_Ltd_2012_ZAWCHC_184_4_October_2012_2013_76_THRHR_451-458">violation</a> of their constitutional housing and property rights – not to mention the negative impact on their dignity and social wellbeing. </p>
<p>In a paper that looked at a <a href="http://www.saflii.org/za/cases/ZAWCHC/2012/184.html">case</a> where a home valued at R81 000 was sold at auction for only R10, I argued that a sale like this would be unconstitutional. I also argued that our law regarding auctions are in drastic need of change due to loopholes like this.</p>
<p>The upcoming amendment of the court rules promises to close the loopholes.</p>
<p>This is an important development that brings South Africa into line with international best practice. For example, <a href="http://noack-immobilienberatung.de/en/hints_en.php">German law</a> already prescribes certain set minimums at which the property must be auctioned. </p>
<p>Introducing similar rules in South Africa means that the country’s home owners and in particular bond holders will be better protected when faced with financial difficulties. It is estimated that South Africa has about <a href="https://www.moneyweb.co.za/investing/property/a-look-at-sas-massive-property-sector-value/">6.1 million</a> formal homes. About <a href="https://businesstech.co.za/news/lifestyle/94083/surprising-number-of-sa-home-owners-are-bond-free/">30%</a> of them are bonded. Reliable figures are hard to come by but some estimates suggest that <a href="https://www.moneyweb.co.za/news/economy/the-medieval-state-of-sas-home-repossessions-industry-2/">thousands of homes</a> are repossessed and auctioned in South Africa each year.</p>
<p>The upcoming amendments include a number of things that relate to the auctioning of homes by creditors. The most important change will be that a court will be able to set a minimum price at which the bidding must start, taking into consideration a number of factors: such as the market value of the property, the amount owed in taxes and levies, and the amount owed to the bank.</p>
<h2>A constitutional matter</h2>
<p><a href="https://www.google.co.za/search?q=section+26+of+the+constitution&rlz=1C1CHWA_enZA699ZA699&oq=section+26+&aqs=chrome.1.69i57j0l5.10175j0j7&sourceid=chrome&ie=UTF-8">Section 26 of South Africa’s constitution</a> protects people from being evicted from their homes without a court order and without a good reason based on all the facts of the case. This right also protects citizens against the unjustified loss of a home when one has defaulted on a mortgage payment.</p>
<p>This basically means that the bank should not be able to automatically repossess a home of a defaulting client. Instead the court must balance the interests of the bank and the debtor and then determine if selling the home is the best solution.</p>
<p>For example, if the outstanding home loan debt is very low or if the financed person is behind with only a couple of instalments, loss of the home should not be allowed easily. Alternatives should be considered to settle the debt.</p>
<p>The <a href="http://www.legalrights.co.za/wp-content/uploads/2017/03/NATIONAL-CREDIT-ACT-NO.-34-OF-2005.pdf">National Credit Act of 2005</a> is helpful because it protects struggling debtors in several ways. A defaulting mortgage debtor can for instance apply for debt review and then possibly receive a new, more affordable payment plan. But this Act doesn’t provide protection during the actual sale of the debtor’s home. So the new court rules come as a welcome addition to close the loopholes. </p>
<h2>The need for change</h2>
<p>Despite the constitutional provisions and the National Credit Act, there have been some loopholes that were exploited by unscrupulous operators.</p>
<p>The major loophole was that after the court has ruled that the property should be auctioned, it could be sold for whatever the highest offer might be. Banks could set a minimum price. But banks tended to set a low minimum price, just enough to cover their claims. </p>
<p>A bank could even decide to auction the house without a minimum price if no one was willing to buy it at the set minimum. The owner of the property could not insist on a minimum price.</p>
<p>As a result, it often happened that speculators would snatch up properties for ridiculously low amounts at poorly attended auctions and then sell them on the private market for huge profits. The owner then suffers a massive loss because he or she must still pay the remaining debt, while someone else profits from the true value of the property. </p>
<p>Recently 225 former homeowners tried to sue the banks for the losses they suffered when their homes were sold for ridiculously low amounts. They lodged a <a href="https://www.fin24.com/Companies/Financial-Services/r60bn-home-repossession-suit-against-banks-20170816">R60 billion law suit</a> with the country’s Constitutional Court. The suit set out to claim damages suffered from repossessions undertaken by South Africa’s big banks. The respondents were Nedbank, Absa, FirstRand Bank (FNB’s parent company) and Standard Bank. The applicants claimed that they were abused by banks who sold their properties far below their market values after they defaulted on their mortgages. The <a href="https://www.groundup.org.za/article/r60bn-constitutional-court-case-against-banks/">suit</a> was lodged with the Constitutional Court because applicants believed that the abuse was a constitutional matter.</p>
<p>But the court disagreed and <a href="https://www.moneyweb.co.za/news/south-africa/concourt-dismisses-application-in-home-repossessions-case/?utm_content=bufferd252e&utm_medium=social&utm_source=twitter.com&utm_campaign=buffer">declined to hear the case</a>, mostly for procedural reasons.</p>
<h2>More can be done</h2>
<p>The amendment of court rules in themselves should certainly close the gaps exploited by unscrupulous operators. But there will be a need for complementary action to make the new rules even more efficient. The system should for example ensure that auctions are better advertised and better attended.</p>
<p>It’s not clear how the wrongs of the past can be corrected, but at least the new rules are a big step in the right direction to ensure justice in the auction industry going forward.</p><img src="https://counter.theconversation.com/content/88026/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Reghard Brits has received funding from the National Research Foundation (NRF) in the form of bursaries for his doctoral studies (2010-2012) and postdoctoral fellowship (2013-2015). From 2018 he will also be a NRF C2 rated researcher.</span></em></p>A change in South African law promises to protect defaulting home owners from abuse by unscrupulous operators who snap up people’s homes for a song.Reghard Brits, Senior Lecturer in Mercantile Law, University of PretoriaLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/770982017-05-15T20:11:51Z2017-05-15T20:11:51ZWhy rent bidding apps will make the rental market even more unaffordable<p>Renters are already the weak party at the negotiating table because they cannot ignore their need for a place to live. But a new series of apps that pit renter against renter will only further tip the balance of power in favour of landlords, making it even harder to get a house.</p>
<p>The fierce competition in the rental market often results in renters paying more than is necessary. Over <a href="http://library.bsl.org.au/jspui/bitstream/1/5826/1/BSL_subm_Senate_Affordable_housing_inquiry_2014.pdf/">150,000 tenants pay more than 50% of their incomes</a> for housing. </p>
<p>These apps may seem like they give renters more power – <a href="https://www.domain.com.au/news/more-rent-bidding-apps-to-launch-in-australia-as-rental-revolution-looms-20170427-gvslpc/">they are marketed</a> using words like “fairness” and “transparency”, but they also <a href="https://www.youtube.com/watch?v=Co2Xz1939Io">note that</a> landlords are missing out on “millions and millions”. </p>
<p>Renting is a zero-sum game. Every dollar that a landlord gains is a dollar out of the tenant’s pocket. And in a market already tilted in favour of landlords, these apps could further push up rents.</p>
<p>To address the problem of renting affordability we need technologies that promote more cooperation between renters, rather than competition.</p>
<h2>The apps</h2>
<p>There are several different rent bidding apps, and they all work in different ways.</p>
<p><a href="http://propertyconnect.com/#renting-made-easy">Live Offer</a> asks prospective tenants to fill out forms and these are then ranked for the landlord to choose. The prospective tenants can see where they are in the rankings, in real time.</p>
<p><a href="https://rentberry.com/">Rentberry</a> is more of a real-time auction site. Prospective tenants submit bids, can see what the current highest bid is and how many bids there have been. </p>
<p>With <a href="http://www.rentwolf.com.au/">Rentwolf</a>, prospective tenants set up extensive profiles, as they would with AirBnB, and then apply for properties through the marketplace.</p>
<h2>What is the right price?</h2>
<p>Real estate is worth what people are prepared to pay for it. But tenants will always be the weak party at the negotiating table. </p>
<p>At least as far back as <a href="http://www.gutenberg.org/files/33310/33310-h/33310-h.htm">David Ricardo in 1817</a>, economists have theorised that landlords take what is left over once other costs are deducted from the tenant’s income. In other words, rent is as much as tenants are able to pay.</p>
<p>Even before that, <a href="http://geolib.com/smith.adam/won1-11.html">Adam Smith</a> recognised that all real estate is a monopoly for landowners. This is because the supply of land is strictly limited, giving excessive negotiating power to whoever owns it. </p>
<p>But these apps overwhelmingly rely on auctions, which can itself be a problem due to what is called the “<a href="http://faculty.chicagobooth.edu/richard.thaler/research/pdf/the%20winner%27s%20curse.pdf">winner’s curse</a>”.</p>
<p>Studies have shown that so long as there are at least two motivated bidders, the winning bid tends to either equal the value, or be one bid above it. In other words, the winning bidder in an auction will often overpay and will “suffer” for having won. </p>
<p>In the case of renters, this means paying excessive rents throughout the lease. Even worse, as more people bid similarly, the ruinous rents become accepted as normal. They become the market rent.</p>
<p>This same phenomenon has been shown in everything from jars of coins to oil-drilling rights and, yes, real estate.</p>
<p><a href="http://www.prres.net/Papers/Small_An_Experimental_Study_of_Auction_Behaviour.pdf">Some research</a> has further shown that in an auction the second-highest bid could be the “rational price”. </p>
<p>My own <a href="http://www.prres.net/Papers/Small_An_Experimental_Study_of_Auction_Behaviour.pdf">controlled experiments</a> have shown that people are easily encouraged by necessity to bid excessively in auctions. This is despite full knowledge of the ruinous consequences. </p>
<p>This is because people have only a limited capacity to vary their needs. We all need to live somewhere, and our culture limits the options. If the option is sharing with relatives or accepting a lower standard of living due to high rents, then our sense of independence will often prompt our willingness to tighten our belts.</p>
<p>These rental apps will play into these stresses and uncertainties, making it more likely people will overbid in the auctions. This is why these rental apps are likely to result in higher rents.</p>
<h2>How technology can reduce rents</h2>
<p>Some time ago <a href="http://www.worldcat.org/title/forecasting-and-investment-selection-in-property-markets/oclc/38378402">researchers</a> suggested that renters might be able to reduce rents by banding together.</p>
<p>Working together, renters would be able to create the equivalent of there being only one buyer in the market – a <a href="http://www.economicshelp.org/labour-markets/monopsony/">monopsony</a>. A monopsony works like a monopoly, but for buyers rather than sellers. For real estate rents, if land owners enjoy a natural monopoly-like advantage, then tenants have to behave like a monopsony to negate the power imbalance. </p>
<p>The current crop of rental apps do not address this imbalance. They only inform bidders as to what other, similarly stressed people, are bidding. It stresses them to bid higher.</p>
<p>Already, we are seeing the power of Facebook to build communities around renting. There are <a href="https://www.facebook.com/groups/355028184670793/">groups that help people find flatmates</a>, for example. If the internet is to tackle the problem of renting affordability, then we need to extend this community, for renters to act in unison on rent.</p>
<p>Without a service that seeks to unite renters, rather than have them compete, housing affordability will only get worse. Rent bidding apps will increase landlord revenues and do so at the expense of tenants.</p><img src="https://counter.theconversation.com/content/77098/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Garrick Small does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>In a market already tilted in favour of landlords, these apps could further push up prices.Garrick Small, Associate Professor, CQUniversity AustraliaLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/692482016-11-24T14:33:41Z2016-11-24T14:33:41ZMarilyn Monroe’s multi-million dollar dress and the evolving power of glitter<p>The dress Marilyn wore to sing happy birthday to JFK sold at auction recently for a <a href="https://www.theguardian.com/film/2016/nov/18/marilyn-monroe-happy-birthday-mr-president-dress">record-breaking $4.8m</a>. Bought by Ripley’s Believe it or Not! chain of attractions, the dress will sit alongside other such wonders as a picture of Einstein made entirely of toast and a two-headed calf. Stupefied amazement is the stock-in-trade of the Ripley concept – and no doubt many a punter will stand, open mouthed, in dumbstruck awe at the presence of this ghostly garment. Or at least, at the price it fetched. After all, it’s just a dress – isn’t it?</p>
<p>Marilyn’s dress may be wispy, immaterial and insubstantial, but it translates nicely into the cold hard cash material girls through the ages have dreamed of. For nostalgia hunters, it evokes memories of a bygone era of style and glamour. </p>
<p>It inspires feminist anger at the exploitation behind her untimely death from overdose. It will certainly draw people with no interest in a mummified cat into a weird little museum. And that dress continues – let’s be frank – to sell news. As we keep being reminded by the rush of commentary on this historic sale, it is an “icon”; a thing which becomes a symbol of something way beyond itself. Oh – and it’s very sparkly.</p>
<p>This simple fact of being sparkly is much more meaningful than it might first appear. In the early decades of the 20th century, sociologist Siegfied Krakauer <a href="https://www.youtube.com/watch?v=JIZeyndTBFc">had already clocked</a> that the glittery distractions of the modern world were the engine rooms of social aspiration. By the 1960s, Reyner Banham, design critic par excellence, was <a href="https://books.google.co.uk/books?id=dwkPe_xut3MC&pg=PA318&lpg=PA318&dq=all+that+glitters+is+not+stainless">writing passionately</a> about the lure of lustre, arguing that the appeal of shiny stuff was both primal and ancient (think gemstones, fire, celestial powers) and fundamentally modern and democratic.</p>
<h2>Glitter politics</h2>
<p>While Her Majesty Queen Elizabeth sports a dazzling crown on our stamps, it’s not becoming for a true aristocrat to flaunt their immense wealth – and, <em>vis-à-vis</em> the 18th century uprising of the French working classes, has proved to be pretty <em>dangereuse</em>. So it was tweed all the way for Her Majesty in those good-will boosting off-duty shots, and it’s tastefully selected <a href="http://www.telegraph.co.uk/fashion/people/the-duchess-of-cambridge-zara-hm-canada-tour-2016/">H&M separates</a> for the Duchess of Cambridge. Posh, yes, but “in your face”. Definitely not. </p>
<p>No – glamour belongs now to a mobile society, in which, with enough light and bling, from courtesan to microcelebrity, anyone can achieve significance by holding the attention of the ever-hungry magpie eye of the public.</p>
<p>And the necessary glitter has never been so accessible. Mass production – and the invention of plastics – have multiplied the modes of sparkle on offer and democratised its price. A 99p vajazzle" may not be considered tasteful in all circles, but it’s pretty hard to ignore, and it suggests an aspiration to a life of pleasure, leisure, style and significance from which most ordinary people have been excluded until shockingly recently. (For the drab reality of working-class life, check out the BBC’s grime-fest <a href="http://www.bbc.co.uk/programmes/b07zd454">Victorian Slum</a> on catch up). </p>
<p>And Marilyn was the bench mark, the fulfilment of this aspiration, an apparition of glowing whiteness and gold and platinum, with a sexy, glossy face that made excellent visual copy at any scale.</p>
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<p>With its irresistibly twinkly rash of tiny jewels, Marilyn’s dress is quintessentially glamorous – and quintessentially Marilyn. Many memorable dresses evoke the Cinderella myth, transforming the wearer – <a href="http://www.telegraph.co.uk/news/celebritynews/12118237/Liz-Hurley-if-I-hadnt-worn-THAT-dress-I-might-have-been-a-worthy-actress.html">Liz Hurley in Versace</a>, for example – but if Marilyn’s is iconic, it’s because it somehow typifies everything we want to believe about her.</p>
<p>The refraction of all that light just about distracts the eye from the simulated nudity of flesh coloured, sheer fabric. This was memorably appropriated in cat suit form by Britney Spears in the video for <a href="https://www.youtube.com/watch?v=LOZuxwVk7TU">Toxic</a>. But it’s striking that Britney performed in her insubstantial garment on a cleared set, while Marilyn wore hers on a stage full of powerful men, before a very real, and respectably-clad audience. </p>
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</figure>
<p>On Marilyn, in that setting, the dress did all the things it was supposed to do, but it also spoke of her vulnerability. Looking back at the footage, we hear a childish voice, see a soft and pretty face – and through the cloth to the fleshy woman’s body beneath. Glamour theorist Gundle <a href="http://www.theluxechronicles.com/the_luxe_chronicles/2008/07/post-4.html">says</a> glamour is a “protective cloak”; I <a href="https://www.amazon.co.uk/Cool-Shades-Vanessa-Brown/dp/0857854453">say</a> it’s armour made from reflected light. But with the hindsight of Marilyn’s fate, and on the lifeless mannequin that the dress’s sellers made to her exact measurements, we see this particular sheer facade as all too penetrable.</p>
<p>Perhaps this goes some way to explaining why we no longer find pictures of Marilyn adorning the homes of upwardly mobile or aspirational women. From ordinary homes to the pages of Hello! magazine, we find another lady of that era in another very famous dress: the unimpeachable Audrey Hepburn in her trademark Oliver Goldsmith wayfarers and black Givenchy dress, which <a href="http://news.bbc.co.uk/1/hi/entertainment/6209658.stm">sold in 2006</a> for just under half a million pounds. </p>
<p>The truly modern staple “little black dress” has iconic appeal of a different kind. Black sucks everything in, appears to give nothing away, and conceals the body. But as a <a href="http://www.barbican.org.uk/artgallery/event-detail.asp?ID=18736">current exhibition</a> at London’s Barbican centre demonstrates, black looms forward nevertheless. It’s minimal and sophisticated, a monument to modern European notions of good taste. The image favoured for reproduction on wall art, cushions and phone cases? Audrey, armed with impenetrable shades, impossibly slim and effortlessly composed, but gazing longingly into the window of Tiffany’s. Because after all, black’s a great backdrop for glitter.</p><img src="https://counter.theconversation.com/content/69248/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Vanessa Brown does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The dress Marilyn wore to sing happy birthday to JFK sold at auction recently for a record-breaking $4.8m.Vanessa Brown, Senior Lecturer in Design and Visual Culture, Nottingham Trent UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/586192016-08-03T03:08:50Z2016-08-03T03:08:50ZMuseum economics: how the contemporary art boom is hurting the bottom line<p>Americans clearly love their museums, particularly in the summer months. In fact, <a href="http://www.aam-us.org/about-museums/museum-facts">museum attendance is estimated at about 850 million visits a year</a>, significantly more than all the major league sporting and theme parks combined (about 483 million in 2011). </p>
<p>That’s in a part because they have a lot of choices. If you include zoos, historical societies, botanical gardens and similar historical or cultural sites, the number of museums in the U.S. <a href="https://www.imls.gov/news-events/news-releases/government-doubles-official-estimate-there-are-35000-active-museums-us">surpassed 35,000 in 2014</a>, more than double the tally in the 1990s. </p>
<p>Art museums, which I would argue make some of the most important contributions to contemporary culture, number about 1,575 and are also very popular. One of the most famous, New York’s Metropolitan Museum of Art (“the Met”), for example, saw a <a href="http://www.museus.gov.br/wp-content/uploads/2016/04/Visitor-Figures-2015-LO.pdf">record 6.5 million visitors</a> in 2015, making it the world’s third most popular museum. </p>
<p>But record attendance doesn’t necessarily translate into record revenue. Just last month, the Met said it is <a href="http://www.nytimes.com/2016/07/16/arts/design/met-to-cut-100-or-more-jobs-in-push-to-steady-finances.html">laying off more than 100 of its employees</a> as it tries to erase a US$10 million budget deficit, just a few months after it <a href="http://www.wsj.com/articles/met-museum-to-cut-spending-as-deficit-looms-1461287217">announced a hiring freeze</a> and voluntary buyouts. </p>
<p>Meanwhile, one of its rivals down the street, the Museum of Modern Art (MoMA), is <a href="http://www.wsj.com/articles/museum-of-modern-art-announces-100-million-gift-from-david-geffen-1461261600">flush with cash</a> and <a href="http://www.nytimes.com/2016/04/22/arts/two-art-worlds-rich-modern-and-struggling-met.html">just received another $100 million</a> for an expansion and renovation. Yet only about <a href="http://www.museus.gov.br/wp-content/uploads/2016/04/Visitor-Figures-2015-LO.pdf">three million people</a> stopped by to see its art in 2015, ranking it 15th in the world. </p>
<p>What explains the different trajectories? Why do some museums flourish while others flounder? </p>
<p>Lately I’ve been exploring the new economics of culture and art markets for a book to be published in 2017 called “The Economics of American Art: Art, Artists and Market Institutions.” <a href="http://www.bobekelund.com">My research</a> leads me to believe there are three reasons why different museums have different fates: fashion, demographics and billionaires. </p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/132861/original/image-20160802-17185-a8adki.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/132861/original/image-20160802-17185-a8adki.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=397&fit=crop&dpr=1 600w, https://images.theconversation.com/files/132861/original/image-20160802-17185-a8adki.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=397&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/132861/original/image-20160802-17185-a8adki.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=397&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/132861/original/image-20160802-17185-a8adki.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=499&fit=crop&dpr=1 754w, https://images.theconversation.com/files/132861/original/image-20160802-17185-a8adki.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=499&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/132861/original/image-20160802-17185-a8adki.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=499&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">New York’s Metropolitan Museum of Art is the third most visited museum in the world.</span>
<span class="attribution"><span class="source">The Met via www.shutterstock.com</span></span>
</figcaption>
</figure>
<h2>Tale of two museums</h2>
<p>MoMA and the Met are two of the top museums in the U.S., making them <a href="http://www.nytimes.com/2016/04/22/arts/two-art-worlds-rich-modern-and-struggling-met.html">excellent illustrations</a> of some of the financing problems facing museums today. </p>
<p>The Met, one of the most comprehensive museums in the world except for a dearth of holdings in modern contemporary art, has an annual budget of approximately $300 million. The museum, however, is currently <a href="http://www.nytimes.com/2016/07/16/arts/design/met-to-cut-100-or-more-jobs-in-push-to-steady-finances.html">facing a deficit</a> of about $10 million that would have ballooned to $40 million if it hadn’t begun laying off personnel. It also put a hold on its expansion of modern contemporary art exhibition space.</p>
<p>The competition for patrons willing to fork over large amounts money has become fierce in the contemporary art field. Besides MoMA, the Met must compete locally with the Whitney (which just opened a new downtown location) and the Guggenheim and with dozens of museums in major cities across the U.S, such as The Broad, a new contemporary museum in downtown Los Angeles. </p>
<p>They also must compete for possession of the masterpieces and other exhibitions that draw the most visitors – and in turn lead to more donations. </p>
<p>Meanwhile, MoMA is experiencing its own unique issues that both illustrate the plus- and downsides of its success. MoMA’s $400 million-plus expansion plan (aided by a $100 million gift from billionaire David Geffen) will mean certain parts of the museum will be closed down during the project, leading to less attendance and revenue. MoMA <a href="http://www.wsj.com/articles/museum-of-modern-art-to-offer-employee-buyouts-1461975639">has offered voluntary buyout plans</a> for some employees who will not be needed. Still, with an <a href="http://www.wsj.com/articles/museum-of-modern-art-announces-100-million-gift-from-david-geffen-1461261600">endowment approaching $1 billion</a>, it’s in pretty good shape.</p>
<p>The current challenges of these two great museums will resolve themselves over time, but the fundamental issues raised underscore some critical economic issues facing many art museums in the U.S. today. </p>
<h2>Chasing after changing tastes</h2>
<p>First, underlying the Met’s financial challenges described above is a perennial problem of all museums: acquisitions policy. </p>
<p>Recent directors of the Met amassed a treasure trove, making it truly a museum of enormous and international scope – with an important exception: modern and contemporary art. The late Thomas Hoving <a href="http://www.telegraph.co.uk/news/obituaries/culture-obituaries/art-obituaries/6790157/Tom-Hoving.html">focused on snapping up</a> Renaissance and Old Masters, such as Velázquez’s “Portrait of Juan de Pareja” and the Egyptian Temple of Dendur. He also developed the now-popular concept of the traveling “blockbuster” exhibition that costs museum-goers an extra charge. </p>
<p>His successor, <a href="http://www.metmuseum.org/metmedia/video/conservation-and-scientific-research/sam-pdmcnsrv">Phillipe de Montebello</a>, also did not add much to the museum’s modern collection. The argument, it seems, was that museums such as the MoMA were already providing such works in their collections and that the acquisition of contemporary art by living artists (some at midcareer) was problematic and risky. </p>
<p>While the Met’s contemporary collection has grown somewhat in recent years, it has been unable to quickly adjust to the changing tastes of museum-goers, who <a href="http://www.economist.com/news/britain/21594262-rapid-growth-art-fairs-changing-way-galleries-operate-fairly-popular">increasingly favor modern and contemporary art</a>. This has put it at a competitive disadvantage. </p>
<p>The economic point here is that if a museum like the Met isn’t able to keep up as its customers’ tastes change, revenue will likely fall. And by the time it might recognize this, it’s already too late to do much about it because the costs to acquire the in-demand art is sky-high. </p>
<p>Since museums acquire either as a donation or a purchase, in the absence of a generous gift, the only alternative is to acquire a “distinguished” collection of work from another institution or private collector. </p>
<p>That alternative is open to few museums in the United States. The reason leads to a second critical issue – the changing distribution of U.S. and world income and its effects on museum finance and operation. </p>
<h2>Billionaires’ bubble</h2>
<p>We are living in a boom period for contemporary art (<a href="http://bigthink.com/Picture-This/can-contemporary-art-become-too-popular">some would say it’s a “bubble”</a>).</p>
<p>The number of <a href="https://www.artsy.net/article/artsy-editorial-how-art-fairs-expanded-the-contemporary-art-market">auctions, art fairs and galleries</a> dealing in that genre has grown enormously to accommodate this burgeoning market. Works by the undisputed master in contemporary art, German artist Gerhard Richter, <a href="https://news.artnet.com/market/top-100-collectible-living-artists-504059?utm-buf">have generated $1.2 billion in sales</a> in recent years.</p>
<p>In a world with <a href="http://www.forbes.com/billionaires/">about 1,800 billionaires</a>, it only takes a relative few to drive high-end art prices to astronomical levels. Recessions, stock market declines and turmoil in international affairs rarely subdue the fight among these collectors for the best of the best, especially in contemporary art. </p>
<p>In addition to such vaunted names as Jackson Pollock, Mark Rothko and Barnett Newman, “hot” young artists born after 1955 are earning top auction prices. From July 2014 to June 2015, auction “hammer prices” by the late Jean-Michel Basquiat, Christopher Wool and Jeff Koons reached <a href="http://www.widewalls.ch/most-expensive-jean-michel-basquiat-artwork/">$33 million</a>, <a href="http://www.artyou.com/newsview/30">$26.5 million</a> and <a href="http://www.forbes.com/2007/11/21/collecting-art-auctions-forbeslife-cx_nw_1121koons.html">$23 million</a>, respectively, for single works of art.</p>
<p>These soaring prices mean museums simply can’t keep up and must usually depend on donations to assemble portfolios of the best work, or they’re priced out.</p>
<p>And billionaires themselves <a href="https://news.artnet.com/art-world/new-york-billionaire-private-museum-chelsea-582314?ut">are increasingly setting up</a> their own, private museums, further distancing the ability of public museums to get the good stuff. </p>
<h2>Demographics and recessions</h2>
<p>A third interrelated problem is that demographic issues have exacerbated the problems of museum finance and operations by putting pressure on the revenue side of the equation. </p>
<p>Unemployment, early retirements and the aging of the population in the United States have all contributed to increased attendance at museums of all types. You might think that’s simply a good thing. And in many ways it is. But more traffic means higher costs, and when those additional visitors don’t result in more revenue, profitability goes down. </p>
<p>This is because of the longstanding movement toward making museums “free” by having individuals, government or businesses “sponsor” the cost. But when that support gets reduced by budget costs or another reason, museums must either choose to pick up the tab or lose patrons by suddenly charging fees. </p>
<p>There is <a href="https://www.questia.com/library/journal/1G1-199068924/art-museum-attendance-public-funding-and-the-business">empirical evidence</a> that museum attendance is countercyclical. That is, it rises when economic growth slows, but that’s also when those “sponsors” are more likely to begin to disappear. In other words, the Met’s record attendance figures sound great on the surface but may have contributed to its budget shortfall by adding to its costs.</p>
<h2>Value of art</h2>
<p>Museums will certainly continue to exist and provide hundreds of millions of us with invaluable insights into our culture, both past and present. </p>
<p>But they must exist under the imperative of economic principles. Tastes will change, income distribution will alter the availability of art and demographics will shift. </p>
<p>While none of these factors negate the importance of art museums, it’d be wise for their stewards to consider the economics in their calculations.</p><img src="https://counter.theconversation.com/content/58619/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Robert Ekelund does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>New York’s Met just announced more job cuts to balance its books as the shifting tastes and demographics make it harder to make a museum’s ends meet.Robert Ekelund, Eminent Scholar and Professor of Economics Emeritus, Auburn UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/537752016-02-05T11:09:10Z2016-02-05T11:09:10ZThe rise and fall of the Knoedler, New York’s most notorious art gallery<p>In Manhattan Federal Court, there’s a trial taking place that has highlighted just how murky the business of art authentication has become. </p>
<p>After suddenly closing in 2011 in the wake of massive lawsuits, Knoedler Gallery and its former director, Ann Freedman, are finally having <a href="http://www.nytimes.com/2016/01/25/arts/design/knoedler-gallery-heads-to-trial-in-sale-of-a-fake-rothko.html">their day in court</a>: they’re currently faced with a civil lawsuit leveled by collector and Sotheby’s chairman Domenico de Sole, who thought he had bought an US$8.3 million Rothko from the gallery. It was actually painted by Pei-Shen Qian, <a href="http://www.nytimes.com/2013/08/17/nyregion/struggling-immigrant-artist-tied-to-80-million-new-york-fraud.html">a Chinese immigrant living in Queens</a>. </p>
<p>But the collapse of the Knoedler, New York’s oldest art gallery, was much more protracted and complex than the <a href="https://news.artnet.com/art-world/7-things-knoedler-trial-413285">forgery trial</a> taking place. The gallery’s fall has much to do with profound changes in the gallery business over the last century and the increasing scarcity of profitable secondary market material. </p>
<h2>A history of questionable dealings</h2>
<p>When Michael Knoedler arrived in New York in 1846 as a representative of the French lithographer <a href="http://www.nytimes.com/2001/04/20/arts/art-review-a-return-to-the-junction-of-art-and-commerce.html">Goupil & Cie</a>, the city had virtually no art dealers to speak of. </p>
<p>Because few Americans could afford to purchase one-of-a-kind oil paintings, Knoedler’s job was to sell customers <a href="http://www.getty.edu/research/special_collections/notable/knoedler.html">inexpensive prints from Paris</a>. </p>
<p>By the turn of the century, the gallery advanced boldly into the field of original old masters and – with <a href="http://www.ebay.com/itm/J-P-Morgan-Collection-Paintings-Exhibition-1943-Knoedler-Gallery-WWII-Benefit-/281901169854?hash=item41a29e7cbe:g:D8cAAOSw8-tWYTdm">J.P. Morgan</a> and <a href="http://www.frick.org/sites/default/files/archivedsite/exhibitions/vermeer/frick.htm">Henry Clay Frick</a> as clients – became a serious rival to the dominant dealer of the era, <a href="http://blogs.getty.edu/iris/treasures-from-the-vault-the-man-of-la-belle-ferroniere/">Joseph Duveen</a>. </p>
<p>But the ongoing court case isn’t the first time the gallery has been embroiled in nefarious dealings. In 1931, representatives of Knoedler <a href="https://www.wilsoncenter.org/sites/default/files/op30_dumping_oils_art_sales_williams_1977.pdf">purchased 21 masterpieces from Russia’s Hermitage Museum</a> for Andrew Mellon in a set of secret sales sanctioned by Joseph Stalin. The works included van Eyck’s <a href="http://blogs.getty.edu/iris/treasures-from-the-vault-knoedler-mellon-and-an-unlikely-sale/">Annunciation</a> and Botticelli’s <a href="http://www.nga.gov/content/ngaweb/Collection/art-object-page.24.html">Adoration of the Magi</a>, which sold for roughly <a href="http://blogs.getty.edu/iris/files/2013/07/knoedler_hermitage.jpg">$900,000</a>. </p>
<p>The deal, brokered by <a href="https://en.wikipedia.org/wiki/Armand_Hammer">Armand Hammer</a>, an American with close business ties to the Soviet Union, began the gallery’s long, tragic involvement with the Hammer family.</p>
<p>Nor is the recent case their first brush with forgery. In the 1958 edition of <em>Art News Annual</em>, the gallery took out a full-page ad with a 1948 Matisse that turned out to be a fake by the notorious forger <a href="http://www.intenttodeceive.org/forger-profiles/elmyr-de-hory/the-artifice-of-elmyr-de-hory/">Elmyr de Hory</a>. </p>
<p>When <a href="https://theconversation.com/the-secret-to-all-great-art-forgeries-50173">Elmyr’s forgeries</a> were exposed in 1968, Knoedler’s top dealer, E. Coe Kerr, <a href="http://ekonyvtar.sk-szeged.hu/JaDoX_Portlets/displayContent?docId=14200&secId=14236">conceded</a>:</p>
<blockquote>
<p>It was a great painting. You would never dream it was a fake.</p>
</blockquote>
<h2>A gallery reborn</h2>
<p>Soon after the ignominy of the Elmyr affair, Knoedler found itself teetering on bankruptcy.</p>
<p>In 1971, the gallery <a href="http://blogs.artinfo.com/lacmonfire/2011/12/01/hammer-foundation-pulls-plug-on-knoedler/">was sold for $2.5 million</a> – to their old partner in the Hermitage deals: Armand Hammer.</p>
<figure class="align-right ">
<img alt="" src="https://images.theconversation.com/files/110021/original/image-20160202-32231-1fcy7c5.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/110021/original/image-20160202-32231-1fcy7c5.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=760&fit=crop&dpr=1 600w, https://images.theconversation.com/files/110021/original/image-20160202-32231-1fcy7c5.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=760&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/110021/original/image-20160202-32231-1fcy7c5.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=760&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/110021/original/image-20160202-32231-1fcy7c5.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=955&fit=crop&dpr=1 754w, https://images.theconversation.com/files/110021/original/image-20160202-32231-1fcy7c5.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=955&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/110021/original/image-20160202-32231-1fcy7c5.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=955&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Armand Hammer.</span>
<span class="attribution"><a class="source" href="https://upload.wikimedia.org/wikipedia/commons/f/fc/Armand_Hammer_82.jpg">Wikimedia Commons</a></span>
</figcaption>
</figure>
<p>Hammer made the excellent choice of appointing his business partner <a href="http://holywar.org/jewishtr/26art.htm">Maury Leibovitz</a> to run the operation. Leibovitz, in turn, hired a well-connected art world figure, <a href="https://books.google.com/books?id=sPGdBxzaWj0C&pg=RA2-PA60&lpg=RA2-PA60&dq=lawrence+rubin+knoedler&source=bl&ots=qbhgGGyHyi&sig=3uZHFjrJmpCNhCJVt48WnfE52Z4&hl=en&sa=X&ved=0ahUKEwiD8vXMpNfKAhVDdD4KHTB3AE84ChDoAQgjMAI#v=onepage&q=lawrence%20rubin%20knoedler&f=false">Lawrence Rubin</a>, as gallery director. </p>
<p>Leibovitz and Rubin reversed flagging revenues by switching up the business model. No longer did the gallery deal in old masters and classical modernists. They reoriented their focus, switching to midcentury and contemporary art and representing artists like <a href="http://www.nytimes.com/1996/12/01/arts/150-years-of-helping-shape-a-nation-s-taste.html?pagewanted=all">Frank Stella, Richard Diebenkorn and Robert Rauschenberg</a>.</p>
<p>Leibovitz also understood that galleries rarely survived on one revenue stream alone. He revived Knoedler’s original business model – printing and selling serial artworks – and featured the prints of the immensely popular expressionist painter <a href="http://www.leroyneiman.com/shop/">Leroy Neiman</a>. </p>
<p>As one former employee of Leibovitz’s explained:</p>
<blockquote>
<p>The main reason the Knoedler Gallery stayed afloat before 1993 was because of the genius of the president, Maury Leibovitz, and his strong relationship with LeRoy Neiman. The revenues from the lucrative publishing and printing deal between Neiman and Knoedler allowed the gallery to stay in business. </p>
</blockquote>
<h2>Things fall apart</h2>
<p>Armand Hammer died in 1990, and his grandson, Michael A. Hammer, assumed control of the gallery. When Leibovitz died in 1992, the gallery’s relationship with Neiman deteriorated. Then, in 1994, Michael Hammer dismissed Rubin, ceding total control of the operation to his protégé Ann Freedman, which caused an exodus of artists led by Rauschenberg. </p>
<p>The gallery needed to find a source of income to replace their lost artists, especially a cash cow like Neiman. Furthermore, the big auction houses, Christie’s and Sotheby’s, were increasingly dominating the business of selling canonical artworks on the secondary market. </p>
<p>Enter: an obscure Long Island gallerist named Glafira Rosales, who represented a collection of undiscovered Abstract Expressionist works belonging to an anonymous “Mr. X.” Rosales was willing to sell the pieces to Knoedler at below-market prices. </p>
<p>Perhaps alarms should have immediately sounded in 1993. That year, the estate of Richard Diebenkorn <a href="http://www.nytimes.com/2012/05/07/arts/design/knoedler-now-in-dispute-over-diebenkorn-drawings.html">claimed</a> two drawings from his Ocean Park series were fakes. Without the profits from these sales, however, Knoedler <a href="http://www.nytimes.com/2012/10/22/arts/design/knoedler-made-huge-profits-on-fake-rothko-lawsuit-claims.html">would have likely collapsed</a>. </p>
<p>In fact, much of the argument for Ann Freedman’s culpability in the ongoing trial comes from the unlikely profitability of these sales. Many had achieved resale values <a href="http://www.artnews.com/2015/08/11/knoedler-gallery-settles-three-lawsuits-from-forgery-scandal/">five to eight times their purchase price</a> from Rosales. Any dealer would be thrilled to make that kind of opportunistic deal; but if it presents itself too often, then it’s likely the goods are fake, stolen work or were illegal exported. </p>
<p>Yet despite some more red flags – including a Pollock sold in 2002 that the International Foundation for Art Research (IFAR) <a href="http://www.artnet.com/magazineus/features/grant/the-knoedler-mess-4-2-12.asp">couldn’t find support for the claimed provenance</a> – Knoedler’s continued to sell works coming from the collection of Rosales’ mysterious Mr. X. </p>
<p>The full scale of the alleged conspiracy, however, became apparent only through two concurrent cases. </p>
<p>One was a Robert Motherwell painting from the artist’s <em>Elegy to the Spanish Republic</em> series sold by Julian Weissman, a former Knoedler employee (who also bought from Rosales). </p>
<p>The Dedalus Foundation (which publishes the authoritative compendium of Motherwell’s body of work) <a href="httP://www.wsj.com/articles/SB10001424052748704608504576208622894968298">first wrote in 2007</a> that it would be included in the upcoming edition. However, it wrote back two years later to say it would not; in the intervening years, the piece had been tested and found to contain materials not yet patented at the time the painting was purported to have been made. </p>
<p>The other case involved another Pollock that Knoedler sold to hedge fund manager Pierre Lagrange with an assurance, apparently, that it would be included in the updated edition of Pollock’s <em>catalogue raisonné</em>. In fact, the artist’s authentication board <a href="http://www.artnews.com/2012/02/28/a-matter-of-opinion/">had been disbanded since 1995</a>.
When Lagrange found that neither major auction house would not accept the painting for sale, he <a href="https://www.ifar.org/case_summary.php?docid=1375805580">filed suit</a> in 2011, and the gallery promptly closed. </p>
<p>The biggest indictment, however, may concern the abstract expressionist art movement. The current court case surrounds a Mark Rothko forgery that Art Basel founder Ernst Beyeler <a href="https://news.artnet.com/art-world/knoedler-lawsuit-sublime-rothko-becomes-junk-without-changing-416162">described as</a> “sublime.” Perhaps those philistines who sneered at Rothko, Pollock and Motherwell – saying that anyone could do that type of abstraction – weren’t so far from the truth. </p>
<p>After all, if a Chinese immigrant in Queens could do them all quite convincingly, one has to wonder how many other abstract expressionist fakes have been bought and sold. </p>
<p>And if a high-profile gallery was willing to sell them, can anyone really trust the authentication process that’s in place – for abstract expressionist works and beyond?</p><img src="https://counter.theconversation.com/content/53775/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Jeffrey Taylor does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>What, exactly, was going on at the Knoedler Gallery in the years leading up to a forgery indictment?Jeffrey Taylor, Assistant Professor of Arts Management, Purchase College State University of New YorkLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/509212015-12-09T04:08:48Z2015-12-09T04:08:48ZBuy art because you love it – not because it might make you rich<figure><img src="https://images.theconversation.com/files/104643/original/image-20151207-9082-14jomuv.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">William Kentridge art exhibition in Beijing. Kentridge is one South African artist who has made commercial success worldwide.</span> <span class="attribution"><span class="source">EPA/How Hwee Young</span></span></figcaption></figure><p>Standard financial <a href="http://www.bloomberg.com/bw/articles/2013-02-14/u-dot-s-dot-homeowners-are-repeating-their-mistakes">advice</a> for businesses and individuals is to reduce risk by <a href="http://seattlebusinessmag.com/business-corners/family-business/business-owners-need-think-about-diversifying-their-investments">diversifying</a> investments. One way to do this is through investing in fine art. But how does art stack up in terms of returns against the other three main asset classes - shares, bonds and property? </p>
<p>A recent <a href="http://www.econrsa.org/publications/working-papers/art-investment-portfolio-diversification-strategy-south-africa">working paper</a> uses the Citadel Art Price <a href="https://www.citadel.co.za/ArtIndex/706/latest-index">Index</a> to examine whether art is a good way to diversify an investment portfolio in relation to movement of three South African indices - a share index, a house price index and a government bond index. </p>
<p>Contrary to the popular view, the findings indicate that investing in art is the most risky of the four asset classes and produces limited returns. Buying art because you enjoy it seems to be the best motivation.</p>
<p>Nevertheless, investing in art remains fascinating for two reasons: the possibility of making a big return if talent can be spotted early; and the simple pleasure of owning art. </p>
<h2>The fine art market</h2>
<p>South Africa’s art market is small but has seen substantial growth in the past few years with the establishment of new art fairs and galleries. The country boasts a modest number of famous artists, such as <a href="http://www.thepresidency.gov.za/pebble.asp?relid=7848">William Kentridge</a>, <a href="http://walterbattiss.co.za/">Walter Battiss</a>, <a href="http://www.gerardsekotofoundation.com/artist-overview.htm">Gerard Sekoto</a> and <a href="http://www.irmastern.co.za/view.asp?pg=artwork">Irma Stern</a>, who have made international fame and substantial <a href="http://www.johansborman.co.za/sa-masters/">commercial success</a>. But this does not mean that there are not lucrative opportunities for investment. </p>
<p>In an efficient market, prices reflect all available information, making future returns unpredictable. This is not the case with art.</p>
<p>Returns calculated from an index of art auction prices do not reflect all available information. This is because the seller fixes a reserve price, which only the seller and the auctioneer know. If the art work does not reach the reserve price, the work is reported as unsold and this information is not incorporated into the index. </p>
<p>Risk and return on art investment is also atypical in that art has both investment and consumption components to it. In addition to financial return, art also provides a “<a href="https://www.aeaweb.org/articles.php?doi=10.1257/aer.99.4.1653">utility dividend</a>” in the form of the aesthetic pleasure that the owner gets from looking at it. </p>
<p>The difference in return between art and other investments may be capturing the value that the owner receives from owning an asset that is also a consumption good. Thus an art asset’s payoff will be increased by the utility dividend and art investors will not need to be compensated by as much in financial terms as conventional financial assets.</p>
<p>The fact that art has the potential for resale and that prices can fluctuate over time means that art has some of the same features as financial assets. This is because it can be used to protect against inflation, as a source of capital gain and a store of wealth.</p>
<p>But the way that artworks derive their value is different to other financial investments. 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.</p>
<p>Another aspect of an artworks’ price that distinguishes it from other financial assets is that the supply of art from any particular artist, when they have stopped producing, is fixed. This means that the price is fully determined by demand.</p>
<h2>What we found</h2>
<p>Our research showed that when compared to indices of shares, house prices and government bonds, the art price index is the most volatile of asset classes and hence the most risky to invest in. </p>
<p>Although the art price index moved with the share price index, there was a lag of three months. For example, when there are increased returns on the stock markets in the previous quarter and wealth increases, there is a change in the art price in the same direction. </p>
<p>The fact that share prices and art prices are significantly positively correlated suggests that there is little value for investing in art as opposed to shares. Since art is a luxury good it would be expected that when people become wealthier they invest in art as a means of savings or for status. </p>
<p>There is no statistically significant relationship between the art price index and the house price index. But the art price index is negatively related to the South African government bond price index. This suggests that art offers a way of diversifying a bond portfolio, but the relationship is also not statistically significant.</p>
<p>In sum, the results of this study suggest that art does not seem to offer a good way to reduce risk in an investment portfolio dominated by shares. Investing in art is the most risky of the four asset classes, followed by shares. </p>
<p>The riskiness of art as investment choice is also reinforced by the fact that the art market is found to be inefficient. Buying art because you enjoy looking at it, rather than because you hope for a big financial return, still seems to be the best motivation for the purchase.</p>
<p>Internationally, art markets are growing with some record prices achieved at auction for old masters, driven particularly by interest from developing countries, like <a href="https://www.washingtonpost.com/news/wonk/wp/2015/05/12/why-this-picasso-sold-for-180-million-and-what-it-tells-us-about-the-worlds-super-rich/">China</a>. But as growth begins to slow, the Citadel Art Price Index entered negative territory <a href="https://www.citadel.co.za/ArtIndex/706/latest-index">this year</a>, and it remains to be seen how resilient art prices will be. </p>
<p><em>Brett Scott co-authored this article. He recently completed his MA in Art Business at the Sotheby’s Institute of Art, with a specific focus in art finance.</em></p><img src="https://counter.theconversation.com/content/50921/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Ferdi Botha receives funding from Economic Research Southern Africa. </span></em></p><p class="fine-print"><em><span>Jen Snowball receives funding from Economic Research Southern Africa. </span></em></p>South Africa’s art market has seen substantial growth in the past few years. But investing in art remains risky and produces limited returns.Ferdi Botha, Senior Lecturer, Department of Economics and Economic History, Rhodes UniversityJen Snowball, Professor of Economics, Rhodes UniversityLicensed as Creative Commons – attribution, no derivatives.