Photo: Flickr / Rayane Merghad
We already know retail therapy and investing with our emotions don’t pay off. Now there’s evidence pointing to the financial hazards of investing in collectibles. According to Barclay’s latest Wealth Insights report, every investment has some emotion tied to it, but feelings run deeper when we invest in a tangible item we love, such as a priceless work of art.
The utility of the item might not even be much—a Picasso is only as useful as a movie poster, after all—but there are a few behavioural biases that skew decision-making at our expense.
First, there’s the availability bias, in which investors draw faulty conclusions from information on hand:
“‘Because media reports on art sales tend to focus on the spectacular gains and the record-breaking
hammer prices, investors may falsely believe that these are representative of broader trends in the market. ‘Stories about those spectacular gains give investors a false sense of security that the average return on art is very high because those cases are the most available in their memory,’ explains Professor Statman.”
At public auctions, bidders tend to suffer from a second bias known as the winner’s curse. In this case, a winner gets overly optimistic about an item’s value and then overpays:
“People will tend to pay more and consider a purchase to be less risky if they like an object and they’ll also pay more if they are in a good mood, says Professor Pownall.'”
The next bias, anchoring, stems from basing the value of an item on a previous sale, says Barclays.
“This can create distortions because the previous sale may have taken place in a “hot” market, when valuations were unusually high, or in a “cold” market, when they were uncharacteristically low.”
Perhaps the worst bias of all is the attribution bias, in which people find ways to justify their emotional investment based on the item’s rising or falling price:
“According to the attribution bias, people think of assets differently depending on whether they are rising or falling in value,” says Professor Pownall. “If prices are rising, they will be happy to think of collectibles as an investment but, if they are falling, they are more likely to say that they bought something because they like it.”
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