The neuroeconomics of Art collecting

brain_1.gifDid you read the New Yorker piece last week on neuroeconomics i.e. the integration of neural-processes science into the study of economic decision making by individuals? I couldn’t help but think of the artworld when I read this section:

“When people make investments, they weigh the possible outcomes of their decisions and select a portfolio of stocks and bonds that offers the highest possible return at an acceptable level of risk. That is what mainstream economics says, anyway. In fact, people often have only a vague idea of the risks they face. … In one study, Camerer and several colleagues performed brain scans on a group of volunteers while they placed bets on whether the next card drawn from a deck would be red or black. In an initial set of trials, the players were told how many red cards and black cards were in the deck, so that they could calculate the probability of the next cards being a certain color. Then a second set of trials was held, in which the participants were told only the total number of cards in the deck.

The first scenario corresponds to the theoretical ideal: investors facing a set of known risks. The second setup was more like the real world: the players knew something about what might happen, but not very much. As the researchers expected, the players brains reacted to the two scenarios differently. With less information to go on, the players exhibited substantially more activity in the amygdala and in the orbitofrontal cortex, which is believed to modulate activity in the amygdala. The brain doesn’t like ambiguous situations, Camerer said to me. When it cant figure out what is happening, the amygdala transmits fear to the orbitofrontal cortex.

The results of the experiment suggested that when people are confronted with ambiguity their emotions More…can overpower their reasoning, leading them to reject risky propositions. This raises the intriguing possibility that people who are less fearful than others might make better investors, which is precisely what George Loewenstein and four other researchers found when they carried out a series of experiments with a group of patients who had suffered brain damage.”

Seeing as the artmarket is rife with such ambiguities, I see two ways to apply this finding. One is as an explanation of the herd mentality that drives so much collecting, i.e. that the people buying in the wake of Saatchi/Rubells/Horts/Ovitz are simply too scared by the ambiguities of the art market to buy anything riskier.

The more interesting implication involves the hypothesis that fear torpedoes people’s judgment, driving them to avoid risky but potentially rewarding strategies in favor of seemingly safer positions. Short term, this protects you, but if you are involved in a market long-term, the risk-takers win out. Which perhaps explains why so often the collectors that blazed their own aesthetic trail are so financially successful when/if they sell off their collections.

They bought based on their own judgment, not on fear. I’m only semi-certain that I’m even thinking about the findings correctly. What implications do you see in this?

4 thoughts on “The neuroeconomics of Art collecting

  1. This is basically the Blink hypothesis. Immediate gut responses are often more accurate than thought-through ones.

    What you’re forgetting, though, is that people like Ovitz and Saatchi are not reacting to markets that have a kind of objective existence, one that they cannot influence but only judge. They are MAKING markets. There are probably a dozen collectors in the world who can do this. The rest, well, for them, it’s the fear factor.

  2. Hmmm.

    I do think fear is a source of confusion in making purchase decisions of any sort. Fear of buying the wrong thing. Fear of being seen to buy the wrong thing and looking foolish. Fear of losing money even if it is the ‘right’ thing. So being devoid of fear removes one source of fuzziness in the decision making process. But it doesn’t stop one buying, if one wants to buy; just confuses the process.

    But I do not equate that to: blink versus reasoning. I see it rather as clear reasoning vs fuzzy reasoning. Blink is closer to what (US Fed Chairman) Alan Greenspan called ‘stochastic estimation’, his cute term for gut feel. But he pointed out that gut feel is informed by experience.

    Of course visual media lend themselves to pure blink decisions: instant love / hate relationships. Something less relevant to general investment decisions. And sadly absent from many Art buying decisions today, where market based reasoning seems to play at least as much a part as ‘blink’ preferences.

    Back to the original question:-

    Of course if one is afraid one follows the herd. And at the front of the herd are people who like to lead. The real question is the criteria that the herd leaders use to make their decisions; i.e. are they buying because they love what they buy? Or are they buying specifically to sell to the herd behind them later?

    That is an interesting question.

  3. I am not sure these elements of the purchasing decision are distinguishable, any more than one could separate the need to be protected from the elements and the urge to impress others in a decision to buy a pair of shoes. I suppose it’s what makes the art market so interesting. As I was going through the galleries yesterday, I was reminded of this seamless fusion once again.

    IN sophisticated luxury economies, what might be described as “pure” interests mingle incessantly with investment decisions, to a point where it would be extremely difficult to uncouple the one from the other. Buying that $3 million condo, or a new Benz, or a Patek Philippe wrist watch — well, you could say that we do need to live somewhere, and drive around, and tell the time, and we do take a visceral pleasure in the that fireplace in the bedroom, the soft leather on the dashboard, or the gazillion complications behind the watchface: But probably nobody can make such a decision without thinking to some extent about investment potential or resale value.

    What makes it even more beautiful, when it comes to art, is that for a limited number of collectors it is not just a question of responding to or anticipating the market. For these buyers the possibility exists, though exercising their taste or through the volume of their purchases, to influence the markets. So it becomes a more exciting game than buying a Mercedes, where you have a fairly defined book value, which you can anticipate quite clearly. The people who do a lot of this buying and selling do get very excited about the sheer complexity and excitement of a good that offers so many opportunities to take pleasure and mix it up with a very complex form of gambling and investing.

  4. I’m with Ian on the blink issue. And I agree that it’s interesting to question whether the artworld’s alpha collectors “are buying because they love what they buy? Or are they buying specifically to sell to the herd behind them later?”

    I think it’s a mix. Some buy what they love and very rarely sell (I think Germany’s Harald Falckenberg and Switzerland’s Uli Sigg would be examples). Some buy what they love, even if in many cases they later change their mind; I think the Rubells fall into this category. Others play a purely strategic game – especially the financiers, whose actions are hardwired by what the French call “deformation professionelle“.

    It might be fun to take a look at, say, an amalgamated list of the Artnews top 10 collectors from the last 5 years and try to parse their motives, based on their selling and buying patterns, to the extent that they could ascertained.

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