Picasso is not just valuable in the abstract

When a group of wealthy investors compete with each other to buy an asset, surely they have a clear idea of its financial value? Jussi Pylkkanen, president of Christie's, who on Monday night auctioned Picasso's "Les Femmes d'Alger" (Version O) to an anonymous buyer for $179.4m, thinks they do.

"People sometimes think of buying art as a frivolous occupation but these bidders are very conscious of what the object is worth, and they make decisions in an extremely considered way," Mr Pylkkanen assured me afterwards. He emphasised that the final bids for the Picasso, in a New York auction that raised $706m for 34 works of 20th-century art, proceeded in careful, $500,000 increments.

Amid record-breaking auctions in London and New York, art is increasingly treated as a financial asset. "Swamped", a painting by Peter Doig, a 56-year-old Scottish artist, sold for $25.9m on Monday night. Billionaires fly to Art Basel Miami Beach to buy from big galleries, private bankers tell clients to diversify into art; masterpieces clog free port warehouses in Geneva.

But paintings are not securities. The financial value of any work of art remains as unknowable and intangible as the Mona Lisa's smile. As the economist William Baumol put it 30 years ago, the prices of paintings "float more or less aimlessly . . . exacerbated by the activities of those who treat such art objects as 'investments'". Those seeking intrinsic value, in the financial sense, must look elsewhere.

Although we do not know who bought the Picasso, beyond the fact that he or she can afford to drop $179m on a work that would be difficult to shift for the same price in a market panic, we can speculate on the motive. The true value lies in owning a painting that the Tate or Getty museums would love to display in public, and being able to dazzle yourself and others in private.

The only way to prove that you are the kind of person who is both cultured and wealthy enough to own a major Picasso is to buy one. Auction houses prosper by holding it in front of you briefly, while offering to sell it to your rival. "They suddenly say, 'I am never going to get this chance again', and go all the way," Mr Pylkkanen says of the world's ultimate art collectors.

Works of art are "a very rational choice for those who derive a high rate of return in the form of aesthetic pleasure," Mr Baumol concluded. The economist John Picard Stein wrote in 1977: "Any superior performance derivable from paintings can be attributed entirely to the viewing pleasure they provide, not capturable by speculators."

There are social as well as aesthetic rewards. The status value of buying art - being invited to gallery and museum dinners, and regarded as a person of exquisite taste - is alluring. Sixty one per cent of collectors surveyed last year by Deloitte, the accounting firm, admitted to this motivation.

The financial returns are murkier, despite the efforts to explain rationally the tide of money flowing into art. Sales of fine art globally rose to €51bn last year, according to the European Fine Art Foundation, overtaking the previous peak of €48bn in 2007. This is minuscule compared with the $294tn of global financial assets, but it demands to be justified financially.

That is hard to do. The Mei Moses World All Art index, which tracks the prices of works sold at auction, rose 7 per cent between 2003 and 2013 - slightly less than the Standard & Poor's 500 index (contemporary art achieved a higher return at 10.5 per cent). Art has performed better than bonds on some measures over some decades, but there are reasons for scepticism.

One is that measuring financial returns on works that are sold and later resold at auction ignores those that never resurface, possibly because they have fallen in value. A second is that the art market is highly illiquid and opaque - no painting, even by the same artist, is exactly equivalent to another work. A third is that the transaction costs are extremely high - auction houses charge buyers about 20 per cent.

The oddest aspect of the market (among many) is that the wealthiest collectors take the least predictable financial risks, at least when bidding at auctions rather than buying works privately through galleries. Masterpieces such as "Les Femmes d'Alger" often underperform in the long term, while less-glamorous paintings stand a better chance of achieving a stable return.

Masterpieces can lose their lustre - postwar art is celebrated as older works have faded. Mr Doig has surpassed Damien Hirst but the buyer of Mr Doig's "Swamped" cannot know whether that will last. Jianping Mei and Michael Moses, the economists, warned in one study of art prices between 1955 and 2004 that "investors should not be obsessive [about] masterpieces and they need to guard against overbidding".

Or perhaps they need not. Defying the odds, making a bravura public statement and finally taking possession of a revered Picasso painting is sufficient. "Standing in front of the object and having people know that you're the buyer is worth all the money in the world," says Jeff Rabin, co-founder of Artvest, a New York art advisory firm.

There is no doubt that "Les Femmes d'Alger" is an extraordinary work of art. Whether it will be an exceptional investment is another question. To the bidder, it may not matter.

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