Abstract
Lack of transparency is considered a major functional deficiency of art markets. The uniqueness of artworks, the subjectivity of the pleasure component in their appeal, the unequal access to verifiable information make information asymmetries, and their potential opportunistic use, one of the dominant characteristics of this market and one that is very difficult to remedy. Yet, art goods are not simply risk-intensive goods, as are financial assets. Their complexity and specificity have given ample room, not only for calls for greater transparency and more credible information, but also for building trust-based long-term relationships. Drawing on the distinction between decisions involving risk and decisions involving trust, the paper discusses how relational trust, based on confidentiality and reciprocity, has helped compensate for the lack of transparency to increase the overall trustworthiness of art markets. Yet, trust-based exchanges have a downside too, since trust, once gained, can also be used opportunistically to defend and exploit positions of privilege and power. This form of strategic trust can become an obstacle to the diffusion of information and the adoption of credible norms of transparency.
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Notes
In the trust game (Berg et al. 1995), the first mover FM—an investor—has to decide whether or not to trust a second anonymous mover—the trusted party—by sending him/her some monetary resources. If FM does not trust, the game ends and both parties stay with their original monetary endowment. If FM trusts, the trusted party can either reciprocate or betray trust. In the first case (reciprocation), both are better off than if they had staid with the original endowment. In the second case (no reciprocation), the trusted party is the only one to reap the gains of the game. The subgame perfect equilibrium solution of this game is for the second mover not to reciprocate. The first mover, knowing this, will not trust. As in Prisoner Dilemma games, this solution is Pareto inferior to the alternative dominated strategies.
This discrepancy between theory and practical trust games situations has been discussed in Edna Ullmann-Margalit (2002). In these games, more than risk and loss aversion is involved. People are often also highly “betrayal averse” and tend to punish those who betray more severely than for an equivalent injury that involves no betrayal of trust (537–538).
Some authors correctly distinguish between generalized trust and particularized trust (Uslaner 2002). The first reflects a moral concern and represents a core value that is not conditional on the actions or intentions of the other party. The second is a strategic, conditional trust, and it is relative to context and experience.
Cox (2004) in particular has been able to identify the betrayal aversion component as distinct from purely altruistic preferences.
Barclays Bank has generated questionnaire data strongly suggesting that art acquisitions are infused with highly psychological and strong social components. In a 2012 report entitled “Profit or Pleasure? Exploring the Motivations Behind Treasure Trends,” only a tenth of those questioned said they bought art purely as an investment, whereas 75 % cited enjoyment (rather than asset value) as the key. The study is based on interviews with 2,000 high net worth individuals in 17 countries (Wealth Insights 2012).
For a recent analysis that explores the emotional value to the owner of holding art, see Pownall (2014).
People’s responses to the risks of future betrayal may even become irrational: Most participants in the experiment chose the high risk safety options rather that the low risk when this included a low probability of betrayal (Koehler and Gershoff 2003: 252).
That this is in fact the case in art markets was highlighted by Orley Ashenfelter in his keynote address titled “Trust, but verify” at the International Art Industry Forum “Trust and Transparency in the Art Market. Complements or substitute?” London, May 10, 2014.
Additionally, some have raised the issue whether deterrence-based trust is in fact trust (Sitkin and Roth 1993) since the existence of control mechanisms makes trust superfluous. Others, such as Frey (2000), have argued deterrence mechanisms can backfire and cause the crowding out of any inherent inclination to trust (see Bohnet et al. 2001).
One such example is the existence of art dealers’ associations such as the ADAA (Art Dealers Associations of America) that seeks to promote high standards of integrity, scholarship, and ethical practice within the profession. I owe this example to an anonymous referee.
This report was commissioned by The European Fine Art Foundation, organizer of The European Fine Art Fair (TEFAF), and compiled by Clare McAndrew, founder of Arts Economics. According to the report, released in March 2013, the total size of the global art market, which includes both public auction data and private art dealer sales, is set at about €43 billion, a decrease of 7 % from the 2011 level, with the best performance continuing to be at the top end. The auction market remains concentrated, with Sotheby’s and Christie’s accounting for a 36 % share of the market in 2012, not counting private sales (McAndrew 2012).
A “third-party guarantee” or “irrevocable bid” is a practice through which an artwork in effect is sold before the auction for an agreed minimum amount. The lot will not be sold below this price but may exceed it. Art auctions report very little about these financial agreements and the potential conflicts of interest they raise: which guarantors are offered the opportunity, their identity, and the level of their commitment.
Consider, for example, the uncertainty and cost associated with bringing a restitution claim for a painting allegedly stolen by the Nazis in Paris but later sold to a state museum in Vienna and brought by grandchildren of the original owners in New York. Which court and which country’s laws, including statutes of limitations and legal requirements of proof, will apply? Or consider the law of libel. In one country, it may be used to render liable a person expressing the judgment that a painting is a fake, but not in others.
Christie’s escaped these punishments by cooperating with the US Justice Department’s inquiry.
A point argued in Dempster (2013).
In an article in The New Yorker December 2, 2013, on prominent dealer David Zwirner, Nick Paumgarten reports Zwirner to have said: “This is an industry in its golden age. When I opened, in 1993, we had a couple of hundred galleries and a few hundred collectors. And now we have, what, a couple of thousand galleries and a couple of thousand collectors. You want to grow a viable business in this climate. The wind is at your back.” (p. 41).
Blacklots, an online auction site, uses the same sort of business model as fashion flash-sale giant Gilt Groupe has now merged with Paddle8.
Another online gallery that provides new alternative business practices is Sedition art, founded in 2011 by Harry Blain and Robert Norton, former CEO of Saatchi Online. Sedition specializes in selling digital art by known artists in limited editions.
McAndrew (2013) TEFAF annual report: pp. 21 and 59.
According to a survey conducted by Arts Economics on premier and second-tier houses in 2012, on average 81 % of sales by value in the top-tier houses are made at auction. Private sales averaged 17 % of the turnover of the top-tier houses, up 2 % on 2011, and only 5 % for the second tier (see 2013 TEFAF report: 31). Whether, on the other side, auction price data, with their own limitations, work as a reference point for dealers is an important but still open question, see Hutter et al. (2007) and Velthuis (2005).
Using Art Genome, an algorithm of some 800 “genes,” or characteristics identified by a group of art experts to describe each artwork, Art.sy also recommends likely complementary paintings, sculptures, photographs, and infinite other artworks to potential buyers (The Economist, January 3, 2013).
Exhibit-E, for example, is a design and technology firm that provides Web sites for the art world as well a Web-based gallery inventory management, thus enormously decreasing the time and costs of these services. With the new online visual exposure and information, both galleries and artists can reach an audience well beyond their geographical setting.
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Acknowledgments
I wish to thank Anna Dempster for having set me thinking along these lines. I am also grateful to two anonymous referees for very helpful suggestions and comments on my initial submission to this Journal.
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Bianchi, M. Willingness to believe and betrayal aversion: the special role of trust in art exchanges. J Cult Econ 39, 133–151 (2015). https://doi.org/10.1007/s10824-014-9224-3
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DOI: https://doi.org/10.1007/s10824-014-9224-3