Are Investors Credulous? Some Preliminary Evidence from Art Auctions

This paper constructs a new data set from art auctions that include auctioneer presale price estimates to examine the credulity of art investors. While auction houses typically made no price estimates before 1973, they start providing highand lowprice estimates for all artworks thereafter. Thus, we have a natural experiment to observe changes in price behavior under the influence of auctioneer estimates. We find that the price estimates tend to have an upward bias for expensive paintings. We also find that high estimates at the time of purchase are associated with adverse future abnormal returns. These results are consistent with the view that investors are credulous. They do not discount fully the strategic incentives of auctioneers. However, we have some preliminary evidence that investors may have made some adjustment recently for the systematic bias in provided information.