The art press currently seems remarkably focused on the high prices fetched for work by a small set of young artists. Many of these high-priced works were previously purchased for far less. A $10 million Peter Doig painting once sold for $30,000 (or some such figure). And works by other young abstract-process-based painters that sold at the primary market for $10,000 later sold at auction for $250,000.

In this setting, it is hardly surprising that many collectors would see the possibility of striking it rich, and this desire by collectors to make financial returns feels more common than in the past. The opening moments of art fairs now feel like a contemporary version of a gold rush, with collectors searching for the latest prospect. My view is that for most collectors, this is fool’s gold.

Some people invest at the blue-chip, liquid end of the market, for example by buying a Gerhard Richter painting. Auction data is typically used to determine the returns to investing on the superstar end of contemporary art, and I have nothing useful to say about this tranche of the market. The rest of the market—the focus here—is navigated through buying from galleries at primary-market prices.

Investing in contemporary art by young artists, as is the current trend in the primary market, is inherently risky. Much of contemporary art is to seek “the different,” and the version of different that ultimately sticks can be hard to identify. Furthermore, the price of an artist’s work often depends on what she subsequently does. As a result, when buying art you are as much buying the artist as the artwork. But people change: they have children, experience breakdowns, decide to become schoolteachers, etc. That means the quality and nature of their work changes. There is also the market’s illiquidity, where a small fraction of successes hit it (financially) big. Young, potential stars are sometimes underpriced (relative to the market) and much of the supposed smart money is located here.

Finding the relevant set of artists to invest in is like finding a needle in a haystack, for the uninformed. At any given moment, there is a stock of artist names in the ether that knowledgeable collectors are acquiring. Even among those, eight or nine of the 10 don’t pan out from a financial perspective. The hard part for collectors is even knowing who the 10 are (a gallerist telling you at an art fair that “a trustee at MOMA just bought one” doesn’t even come close).

The networks of the art world are as sophisticated and cliquish as any high school in the United States. Inside information is rampant, with gallerists and collectors selectively sharing all sorts of useful gossip. Collectors routinely receive communications from people in the art world with information not available to others: which artists are being bought by which collectors, who is changing galleries, who has just been offered a museum show, and so on. Museum curators also play a role, as many of the acquisitions that they receive come from collectors donating work to their collections. (This feels much more extensive than in other investment areas. A central idea behind most forms of financial regulation is that uninformed investors should not be at much of a disadvantage, hence insider trading is banned. Yet inside information abounds in this market.)

In the art world, the well connected get information earlier than the rest of us, and the uninformed pick up the scraps. Even in the rare instance you’re lucky enough to get the one or two out of 10, it may be a short-lived gain. Suppose that you liquidate your gains at auction. Galleries, upset at the resale, often respond by refusing that collector access to work in the future, and many collectors do not liquidate their short-term possible gains in order to maintain their gallery relationships.

The usual way that economists measure investment opportunities is to imagine a portfolio and to simulate how that portfolio would have done. It’s hard to do that counterfactual here. However, when I began to be interested in contemporary art, a helpful gallerist pointed me toward certain publications to get up to speed. One of these was a well-known and respected series of books called Cream, in which well-known curators pick 100 (typically) up-and-coming artists. I bought Cream 3 in my first year of collecting.

As a thought exercise, how would I have done financially if I had invested in all those artists among the 100 that I could have conceivably got? This has a nontrivial margin of error but is instructive of the two major problems with investing in contemporary art for someone who is no better than moderately connected: access and liquidity.

The artists are an esteemed group of 100, and most have had successful careers since the publication of Cream 3, in 2003. Suppose I had tried to buy a piece by all 100 in that year. Of those, I am pretty sure I would not have been offered work by Kai Althoff, Urs Fischer, Beatriz Milhazes, and Julie Mehretu. I simply did not have the contacts that would have allowed me access to those artists.

Assume that I could have purchased works by the rest (although I have a suspicion that a few of the other successes would have been beyond my reach). My best guess is that if I had bought the other 96 artists, and sold them all 10 years later, I would likely have lost maybe half of my initial investment. This is not because these artists have not done well, but because there is no effective resale market for most of them. By contrast—and this is the key point about bid-ask spreads in this industry—if I wanted to buy all those works now, it would likely cost me twice as much as in 2003, if not more. Psychic profits are pretty easy to rack up in the art world; it’s financial ones that are much harder.

Remember, too, that this is not close to a random group of artists I am picking here: instead, this is a group of artists hand-picked as most likely to succeed by an esteemed group of curators, and I’d still have lost my shirt. As such, it is meant as a word of warning to those who think contemporary art remains a good source of investment returns.

Canice Prendergast is W. Allen Wallis Professor of Economics. This essay is excerpted from a working paper.

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