Recently, during a discussion in my Management of Multinational Corporations class, I stopped the Professor during his lecture. He had just said that there was a real question as to whether markets functioned best if managers engage in speculation or just regular investors engage in speculation. I insisted that the question was misleading, saying that the market functions best when both speculate, thereby incorporating as much information as possible into prices.
His response was to refer to the so-called efficient market hypothesis (EMH), arguing that it was indeed the proper question to ask, merely depending on whether or not we believe in the strong or semi-strong form of efficient markets. Clearly, this is kind of putting things backward. Governments influence the market in such a way that prices do not reflect all information, public and private, because trading on private information (so-called insider trading laws) amongst others prevent some of that, though thankfully not all. It is therefore very difficult to have a strong form efficient market. But none of that matters for the debate over efficient markets: clearly it would be better to have as much information as possible in the prices, so as to limit volatility and keep investors fully informed for future prospects.
In any event, the subject has come up recently on The Art Law Blog of all places. Currently, a mild debate has sprung up between the blog’s author and Halsey Minor, who is currently engaged in a lawsuit against auction mega-house Sotheby’s. When asked to pay for three works that he had won at auction, he initially claimed that he was waiting for money from others before he would pay Sotheby’s. A few days later, Minor requested documents from Sotheby’s detailing the nature of its proprietary interest in “Peaceable Kingdom” by Hicks, which I suppose has some redeeming artistic qualities…. But anyway, Sotheby’s immediately sued. Minor countersued claiming that Sotheby’s did not offer full disclosure and presumably had a conflict of interest of the type that would disquality someone selling a home… or something.
Minor is foolishly writing emails to Donn Zaretsky, author of The Art Law Blog. It’s not so much that what he’s saying is wrong — he’s arguing his case — but that is part of the problem. He should not be the one arguing his case, it should be his lawyer. But you can’t tell internet entrepreneurs that, not in their own domain. He claims that Sotheby’s is focusing entirely too much on what he said and when he said it, versus the key issue of their ownership stake. Zaretsky pointed out that the ownership stake was actually public knowledge, disclosed in one or two well known media outlets before the auction.
This is a bit of a tangent to the original point of the post, which is to discuss efficient markets in art. Zaretsky claims:
One odd note, for all the talk of non-disclosure, is that, as Lee points out, Sotheby’s interest in the painting had been mentioned in articles in the New York Times and Bloomberg (and perhaps other publications). […] If you accept any kind of efficient market hypothesis for art, it’s hard to believe that information wasn’t fully absorbed into the price of the work.
Theoretically, Zaretsky is clearly right, meaning that the deal was fair, which would preclude conflict of interests claims in many states. As someone who has only passed the Bar in Florida, I really have no idea what the law in this case will say, but nevertheless. It is worth noting that Zaretsky is not necessarily right. We can accept the EMH for art but not necessarily have it be true in this case, as the price signals could have only been sent to and received by one person, in which case the hypothesis would be meaningless. But Sotheby’s doesn’t work that way… the reason why? They understand that the wider market they can advertise to, the more value they are likely to get for the work at auction, as a virtue of rudimentary microeconomics because they are far more likely to find the person willing to pay the highest price.