Estimates, Bias and "No Sales" in Latin-American Art Auctions, 1977-1996

Author(s): ROBERT B. EKELUND, JR., RAND W. RESSLER and JOHN KEITH WATSON
Source: Journal of Cultural Economics , 1998, Vol. 22, No. 1 (1998), pp. 33-42
Published by: Springer

Stable URL: https://www.jstor.org/stable/41810650

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 Journal of Cultural Economics 22: 33^4-2, 1998. ^3
™ © 1998 Kluwer Academic Publishers. Printed in the Netherlands.

Research Note

Estimates, Bias and "No Sales" in Latin- American

Art Auctions, 1977-1996

ROBERT B. EKELUND, JR.

Department of Economics, Auburn University, College of Business, 415 W. Magnolia - Room 215,
36849-5242, Auburn, AL, U.S.A.

RAND W. RESSLER and JOHN KEITH WATSON

Department of Economics, University of Southwestern Louisiana, Lafayette, LA 70505, U.S.A

Abstract. Estimate bias and "no sales" are investigated in the context of Latin American Art a
conducted in New York between 1977 and 1996. We find that, using a new method for calcul
bias, both Sotheby's and Christie's overestimated art (oil-on-canvas pieces) by 2.7 percen
inclusion of "no sales" raises that proportion to a full one-third of the art traded. Utilizing a b
probit analysis, moreover, we find that the estimate "window" is negatively and significantly
to the likelihood of a "no sale" at auction.

Key words: art auction, Latin American art, bias

1. Introduction

Art auctions and auction data have provided the impetus and foundation for a host
of interesting studies in cultural economics. Questions relating to market efficiency
and, in particular, to the relative rates of return on art vis-à-vis other investments are
capturing economists' attention and creating a host of interesting empirical results.
A good deal of theoretical and experimental work on auction forms and outcomes,
beginning with the seminal work of Vickrey (1961), has also formed a popular
research agenda. However, studies directed to the relation of art auction estimates
to actual bids, with the potential for biased estimates and "no sales" are (to the best
of our knowledge) practically non-existent. One recent study is an exception. Alan
Beggs and Kathryn Graddy (1997), using a sample of Contemporary Art auctions
(Christie's - London) and Impressionist and Modern Art (Christie's and Sotheby's
- New York and London) between 1980 and 1994, show that the price of art work
falls from the beginning of an auction to the end and that the price relative to
the presale estimate falls as the auction progresses (what they dub the "afternoon
effect").1 Moreover, in their case, the estimate for each piece is the average of the
high estimate price and the low. Estimate bias, as Beggs and Graddy note (1997,

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 34 ROBERT B. EKELUND JR. ET AL.

p. 557), is of itself of interest for eco

have shown theoretically, systematic o
explain in art or other markets. It is,
interests to present true valuations (a
assumptions).
While we are not concerned with estimate sequence in particular auctions, as
were Beggs and Graddy, we consider two issues related to their study in this note:
(a) whether, using a large and particular data set on art auctions, bias exists in auc-
tion estimates through time, and (b) whether, developing the concept of a "window"
within auction estimates, such estimates have an impact on "no sales" at auctions.
(Our calculation of auction bias, as shown below, also contrasts to that used by
other writers). Data used in this study is from the Latin American Art auction
market. In 1977, Sotheby's auction house (New York) began conducting semi-
annual auctions dedicated exclusively to Latin- American art. Because of the rising
popularity of Latin- American artists and the success of these auctions, Christie's
auction house (New York) followed suit in 1981. 2 Since that time, Gary Nader
(1997) reports that between 1977 and 1996 over 17,000 pieces of artwork by over
1,300 artists have been offered by these two American auction houses. The records
of these sales - offered twice a year, typically in May and November - and the
information contained in the catalogs published by Sotheby's and Christie's prior to
all auctions provide a great deal of statistical information about the Latin- American
art market.

Preauction catalogs contain pertinent information about each piece offered:

artist's name, artist's dates of birth and death, artist's nationality, dimensions of
the painting, medium of the work, condition of the piece, and whether the piece is
signed or not. One additional piece of information that seems particularly valuable
to potential buyers is a price range estimate. Each auction house has experts in
Latin- American art that, in conjunction with sellers, provide a price range within
which they anticipate the painting will sell. Are these price estimates published by
the auction houses biased and why, typically, are there so many "no sales"? Also,
are the presale price estimates and "no sales" related?

2. Other Studies

Large data sets for many other types of artwork have appeared and have led t
research in the art auction market. For example, James E. Pesando (1993) use
repeat sales of modern prints to estimate the rate of return on art investments. He
finds that prints offer a return of 1.51 percent over the years 1977-1992 - a lowe
rate than most other investments. Using auction house records Agnello and Pierce
(1996) found that American art sold at Sotheby's and Christie's between 1971 and
1992 yielded a real rate of return of 3 percent, a somewhat more favorable return.
Some of this research, in addition to Beggs and Graddy (1997) noted above, con-
siders the presence of bias in presale auction house price estimates. Louargand and

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ESTIMATES, BIAS AND "NO SALES" IN LATIN-AMERICAN ART AUCTIONS 35

McDaniel (1991) find that Sotheby's estimates approximately equal actual prices
for collectibles in 1989 and 1990. According to Agnello and Pierce, auction experts
underestimate the actual price in order to please sellers by fetching actual prices
higher than expected. Agnello and Pierce go on to suggest that buyers and sellers
are entering a "fair game in the art market". While these contrasting results are
interesting and may indeed have merit within the context of particular empirical
models, we attempt to investigate the issue of bias directly with a large, alternative
set of data.

3. Data and Analysis

The source of our data is Gary Nader's reports of Sotheby's and Christie's of New
York Latin-American art auctions from 1977 to 1996. This data set contains many
thousands of observations on art from many media. We concentrate exclusively
on the medium oil-on-canvas in order to obtain a more homogeneous product and
from this data set we obtained observations on 6378 oil-on-canvas pieces offered
for auction. Of the 6378, 4314 sold and 2064 or about 32 percent were "no sales".
Included in the information is the actual price that each piece sold for and pertinent
information that is available in the presale catalogs. "No sales" occur when the
bid price fails to reach the seller's reserve price. Each work of art offered for
auction typically has a reserve price set by the seller that is kept "secret" by the
auction house. However, the auction house usually will tell potential sellers that
the reserve price is 80 percent of the low presale price estimate. This may indicate
that the reserve price is easily determined by observing the low price estimate.
However, the 80 percent "rule" does not always hold - sometimes the reserve price
is lower (or, in some cases, non-existent). Both the low and the high estimates
are determined ultimately, in this case, by the auction houses' directors of Latin-
American art. However, the low estimate may be influenced by the seller's reserve
price since the low estimate will not be below the reserve price.
In keeping with other studies, we wish to determine if there is a bias in the
auction house estimates in Latin- American Art. We calculated the means of the
low and high presale price estimates for each piece (the auction house Guess) and
the percent that that estimate varied from the actual sales price (Bias) for all pieces
that sold ("no sales" excluded in this portion of the analysis). Thus, our calculation
of "guess" and "bias" is as follows:
(Low estimate + High estimate)/2 = Guess
(Guess - Price)/Price = Bias
Importantly, the calculation of bias is in value terms and is expressed as a per-
centage of the difference between the guess and the realized price at auction.
This method of calculating bias contrasts with all of the existing literature, which
presents bias as a simple difference (Guess - Price).
The results and comparisons for each year between 1977 and 1996 are illus-
trated in Tables I and II and Figures 1 and 2. Auction house experts accurately

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 36 ROBERT B. EKELUND JR. ET AL.

Table I.

Year Price Guess

1977 18,088.0 16,250.0

1978 18,567.0 14,824.0
1979 20,152.0 12,004.0
1980 8,681.4 7,344.8
1981 13,315.0 11,362.0
1982 16,528.0 14,755.0
1983 24,937.0 22,313.0
1984 20,457.0 18,290.0
1985 20,319.0 20,771.0
1986 27,777.0 26,135.0
1987 30,966.0 27,696.0
1988 37,574.0 31,673.0
1989 51,903.0 42,005.0
1990 73,921.0 63,015.0
1991 86,709.0 69,255.0
1992 67,699.0 60,682.0
1993 61,475.0 55,837.0
1994 79,808.0 67,199.0
• 1995 75,243.0 78,653.0
1996 78,529.0 74,043.0

anticipate, at least to a large degree, movements in the market. In only two ye

did they predict that the market would rise when in fact it went down and in o
two years did they predict that it would fall when it rose. The experts accurat
predicted all other directions of the movement. Interestingly, one of the years
"overprediction" was 1995. In November, 1994 sales of Latin American art reach
record highs. Only a few weeks later the Mexican economy was in a downw
spin with subsequent devaluation of the Mexican currency. Despite the economi
problems in Mexico, good performance in the May 1995 auctions (due, in so
measure, to IBM's sell-off of it's holdings of prime quality Latin art collect
might have led the auction houses to overvalue works in the November auction
any case, prices fell below estimates and in the opposite direction and no sales r
dramatically as Figures 1 and 2 show.
But these data also reveal a curious phenomenon. In all but two of the twent
years the average price exceeded the guess, but the bias, as we measured it,
positive in 1 1 of the years. This result suggests two factors at work: Guesses a
prices are skewed and in the cases where the guess exceeded the price, the perc
of the upward bias was great enough to offset the large number of times that

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ESTIMATES, BIAS AND "NO SALES" IN LATIN-AMERICAN ART AUCTIONS 37

Table II.

Year Bias

1977 -0.17967

1978 -0.22310

1979 -0.16832
1980 0.11214

1981 0.00615

1982 0.21069

1983 0.11399

1984 0.08533

1985 0.10034

1986 0.07906

1987 -0.01613

1988 -0.08116

1989 -0.11468

1990 -0.05010

1991 0.00079

1992 -0.02568

1993 0.06452

1994 -0.02144

1995 0.19859

1996 0.01070

Figure 1.

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 38 ROBERT B. EKELUND JR. ET AL.

Figure 2.

guess was below the actual selling price. The mean estimate relative to the mean
price is the method used by other researchers to determine if there is an upward bias
in auction house estimates and, from our data, the same method would lead to the
same result. However, calculating the percent that guess exceeds price leads us to a
very different conclusion. The overall mean of the bias (for works actually traded)
as we calculated it is 2.7 percent. Also this analysis excludes "no sales" - the
pieces of art where the high bid did not meet, much less exceed, the reserve price
and certainly did not exceed the auction house estimate. If these are included by
some means, then the auction house guesses would certainly illustrate an upward
bias. Nevertheless, for most of the pieces of work that sold the price was greater
than the guess, which leads, according to the auctioneers, to happy sellers.

4. Predicting "No Sales"

Since 32 percent of the works offered at auction in our sample did not sell, it
is interesting to determine whether these "no sales" are predictable. A "no sale"
occurs quite simply when the highest bid does not meet or exceed the reserve price,
i.e., when the maximum price that a consumer is willing to pay is less than the
minimum price that a seller is willing to accept. The analysis apparently falls under
the general guidelines of simple supply and demand factors. There are certainly
many factors that could be used to estimate the demand and supply of art in general
that would indicate the overall market level of "no sales". However, we attempt to

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ESTIMATES, BIAS AND "NO SALES" IN LATIN-AMERICAN ART AUCTIONS 39

predict "no sales" from the information available to the typical art buyer in the
presale catalogs offered by the auction houses.
The variables that we use to explain "no sales" (no sale = 1, sale = 0) are
the auction house (AH, Sotheby's = 0, Christie's = 1), signature (signed = 1, not
signed = 0), the size or area of the work in square inches, the date of the sale by
year, and the variable that we call "window". Each piece of art has a low and high
estimated price or a range predicted by the experts. Auction estimates, in fact, tend
to encapsulate supply and demand factors in the sense that some "equilibrium"
price range is predicted. Not only the dollar amount of this range varies from piece
to piece, but the range as a percent of the mean of the low and high estimates varies
as well. We define this range as a "window" where:

Window = (High estimate - Low estimate)/Guess

For example, two paintings by Rufino Tamayo "Children Playing with Fire" and
"The Alarm Clock" were estimated to sell between $75,000 and $100,000 and
$70,000 and $90,000 respectively. The guess for the first is 87,500 and its window
is 28.6 percent. The guess for the second is $80,000 with a window of 25 percent.
Some researchers have suggested that the size of the window is an indication
of risk avoidance on the part of auctioneers arising from a lack of certainty about
the market value of the piece. We doubt that this is entirely or even essentially the
case.4 Since the low estimate, in part, may be determined by the seller's reserve
price and the high estimate is determined exclusively by the auction house evalua-
tor, the size of the window can be an indication or signal of the level of the reserve
price relative to the auctioneer's guess. In particular, a small window indicates
that a relatively high reserve price has pushed the low estimate upward toward the
auction houses highest estimate. Alternatively, a large window indicates a relatively
low reserve price and the low estimate will be well below the high estimate. From
this conjecture, we predict that pieces with small windows may have an artificially
elevated low estimate (and thus reserve price) and therefore will be associated with
more "no sales". From this reasoning we offer the following model specification:

No Sale = f( Auction House, Signed, Area, Date, Window),

where No Sale is equal to 1 if the observed painting does not sell at auction, and
equal to 0 if it does. Window is our explanatory variable of interest and for reasons
explained above, we expect this variable's coefficient to be negative.
The problems associated with estimating coefficients of a binomial dependent
variable model utilizing Ordinary Least Squares methodology are well known and
include biased coefficient estimates, inefficient estimators, and heteroscedastic-
ity. Therefore, to test our hypothesis, we employ a binomial Probit which uses
a maximum likelihood estimation technique.5
As the results reported in Table III indicate, Window is negatively and signif-
icantly related to the likelihood of a "no sale" at auction. This result confirms

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 40 ROBERT B. EKELUND JR. ET AL.

Table III. "No sale" prediction

Variable Coefficient t -Ratio Prob.

Auction house 0.17545 5.000 0.0000

Signed -0.21952 -4.992 0.0000

Area -0.267E-08 -0.552 0.58085

Date -0.292E-02 -4.564 0.00001

Window -0.31391 -2.577 0.01290

Chi-square = 53.72; prob. = 0.000001.

N = 6, 378.

our expectation and is consistent with small window

flated reservation price on the part of the seller. As o
reservation price makes a painting more difficult to se
The results also indicate that signed paintings offer
recent years are more likely to sell.6 The size of the p
effect, which is not surprising, since it seems to have n

5. Conclusion

The method of measuring bias used here indicates that Christie's and Soth
have over estimated the value of some Latin- American art in some years bet
1977 and 1996. The overestimate is 2.7 percent in value terms over a twenty-
period, although the addition of no-sales inflates this figure to more than one-
of all art prices offered for sale. This may be due to the fact that some s
influence the low estimate; in particular, they set a reserve price that is abov
level that the auction house would choose. If this is the case, then the ran
the presale estimates, as a percent of the mean, will be smaller and thus serv
a signal to potential buyers that the reserve price is high. Our statistical anal
of the window reveals that the higher the reserve price relative to the true ma
value of the work, the greater the probability of a "no sale". Some private estim
thereby fail accurately to predict the "equilibrium range" of actual market v

Acknowledgements
The authors would like to thank John D. Jackson and Patricia A. Watson for valu-
able assistance in the preparation of this paper.

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ESTIMATES, BIAS AND "NO SALES" IN LATIN-AMERICAN ART AUCTIONS 4 1

Notes

1. Ashenfelter (1989) and Ashenfelter and Genesove (1992), in earlier and related research, locate a
major puzzle in wine and real estate markets, i.e., that identical lots sell at lower prices if placed
later in the same auction.

2. See Paz (1993), Rasmussen et al. (1993) and Colle (1994) for discussions of Latin contributions.
For a brief analysis and history of the Latin- American market see Ekelund et al.
3. Perhaps no issue has received more attention than the nature of returns on art holdings. Study of
the issue is complicated since the full return contains both consumption and investment compo-
nents. Return estimates vary wildly (e.g. Baumol, 1992; Frey and Pommerehne, 1989; Frey and
Eichenberger, 1995) with some recent studies even suggesting that only highest quality art is a
substitute for financial assets (Singer and Lynch, 1997). The latter study is part of an entire issue
of the Journal of Cultural Economics (Vol. 21, No. 3, 1997) devoted to the study of art markets.
4. In a very interesting recent study of Picasso's auction sales (1963-1994) Czujack (1997) finds
that presale estimates had no impact on price. Czujack, however, proxies estimate as a dummy
variable in her regression (1997, p. 233).
5. For a detailed discussion of the appropriateness of the Probit technique, see Greene (1990, chap-
ter 20).
6. We have no good explanation for this result and the internal consistency of this and similar empiri-
cal results remains to be explained. It may be that the "estimators" at Christie's are more prescient
concerning market trends and therefore estimates and "windows" in Latin art. Additionally, James
Pesando (1993, p. 1086) found that prices were, at least for modern prints, systematically higher
at certain auction houses than at others. In particular, he found that, for 447 matched sales at
Christie's and Sotheby's, prices averaged a statistically significant 14 percent higher at Sotheby's
than at Christie's (New York) for the period and art he studied (1977-1992). We (Ekelund et
al., 1998) also found these results for Latin auctions in New York between 1977 and 1996 and,
along with Pesando, are puzzled, especially given the geographic proximity of these particular
markets. Naturally, higher sales at Christie's are consistent with lower prices. But, assuming
effective arbitrage and with virtually identical sales commissions, the significant price differences
remain most curious and merit further research.

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