If you love prediction markets you should love the art world

Think of art markets, and art collecting, as an ongoing debate over what is beautiful and also what is culturally important.  But unlike most debates, you have a very direct chance to “put your money where your mouth is,” namely by buying art (it is very difficult to sell art short, however).  In this regard, debates over artistic value may be among the most efficient debates in the world.  At least if you are persuaded by the basic virtues of prediction markets.  The prices of various art works really do aggregate information about their perceived values.

I have, however, noted a correlation, how necessary or contingent I am not sure.  The “white male nerd types” who are enamored of prediction markets tend to be especially skeptical of the market judgments of particular art works, most of all for conceptual and contemporary art.

In my view, discussions about the value of art, as they occur in the off-the-record, proprietary sphere, are indeed of high value and they deserve to be studied more closely.  Imagine a bunch of people competing to make “objects that are interesting but not interesting for reasons related to their practical value.”  And then we debate who has succeeded, or not.  And those debates reflect many broader social, political, and economic issues.  And it is all done with very real money on the line.  The money concerns not just the value of individual art works, but also the prestige and social capital value that arises from having assembled a prestigious and insightful collection.

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Can it really be a prediction market if there is no mechanism to sell short?

If I think a piece of work is overvalued, then how can I act in the market to move it back towards fair value?

By making better art and selling it for less

Also like, there are A LOT of people doing art at any given moment, are there not? If anything is actually overvalued, shouldn't be to hard to find a suitable, lower-cost alternative, whatever that meant in artistic terms

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What if Rembrandt-attributed paintings are overvalued, but P-attributed paintings are valued at exactly their true worth?
How can one make more Rembrandt-attributed paintings? (credibly, of course)

Personally I do think that Rembrandt is over-rated. I don't particularly expect the market to shift toward my point of view but if I did, yes the lack of a way to short art creates a missing market problem. I don't have a way to put my money where my mouth is by shorting Rembrandts.

DanC makes a very good comment: if the market for art played the role role that Tyler claims, of giving people a way to express their predictions about the future value of works of art, then we'd see firms buying and selling portfolios of paintings (which could create futures and options markets). But we don't, AFAIK. Like the dog that didn't bark, the absence of such investment vehicles tells us that art auctions are carrying out a different role.

People may differ on Rembrandt's quality, but there's no doubt that he's dead and there will be no further genuine supply; thus his paintings have at least two sources of value: quality & rarity.
Thus it's possible for the market to shift toward your point of view even while his work fetches ever higher prices. Perhaps it already has.
Disentangling the various components of (ever-increasing) prices is hard.

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The old fashioned way: by insuring it for what you paid for it and then arranging for it to be accidented.

(How to short art, not a straightforward method for price correcting, which is what you asked for.)

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The art market has a huge asymmetric information problem.

It's not a bug, it's a feature

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The trouble with “put your money where your mouth is" is that it's trying to predict how other people will value the art. It's like noise trading in financial markets. Or like fantasy football, where you win not by predicting who the best players will be nor even how they'll perform but also how their coaches will use them. I.e. instead of betting on fundamentals or true football value it's betting on the whims of the market.

A better principle for buying art? Buy the art that you value, not that you think others will value.

As I wrote in 2014:

Billionaires are, almost by definition, extremely good at buying and selling stuff. And they love buying low and selling high. After they’ve made their pile, buying a white painting for say $8 million and then unloading it on some other billionaire a few years later for $15 million is fun for them. And the fact that the painting could turn out to be a worthless forgery made by some Chinese guy in Queens for $400 just makes the game more exciting. Small timers can’t afford to play this game.

The more random the piece of stuff they’re competing with other billionaires over, the better. A white painting is a great test of a billionaire’s salesmanship and investorship precisely because it doesn’t have any value other than all the salesmanship that has been projected onto it over the years. It’s a blank slate! (Hey, that sounds like a pretty good sales pitch.)

So maybe that helps explain the mystery of why billionaires are so much more enthusiastic about contemporary painting these days than non-billionaires: because the paintings are just embodied metaphors for buying and selling. And billionaires love buying and selling. Buying and selling has been very very good to them.

http://www.unz.com/isteve/billionaires-and-art/

How do you explain S. Wynn putting his hand through a painting and ruining it? Pretty myopic of a billionaire to ruin his own art, especially after somebody paid a pretty penny to buy it?

Bonus trivia: Wynn was brought down by the #MeToo movement!? Amazing, but I think some people wanted him to leave for other reasons? (Wikipedia) "Lawyer Lisa Bloom announced in March 2018 that she was representing a client who had been a dancer for one of Wynn's shows. She reported that Wynn made the dancers strip down to bras and panties and "leer" at them during rehearsals. In response, Wynn filed a defamation lawsuit against Bloom, pointing out that he is legally blind.[77]"

Hotelier Steve Wynn's ultra-expensive golf course in Las Vegas, where Phil Mickelson defeated Tiger Woods last month, is called Shadow Creek. It's designed to be easy on Wynn's eyes because he's extremely sensitive to direct sunshine.

Shadow Creek's golf course architect, Tom Fazio, gives Wynn much of the credit for the success of the design. Wynn is a master showman and he gave Fazio much good advice over how to pace the golf course over the 18 holes, with signature holes alternating with more understated holes, for the maximum enjoyment of the clientele. A round of golf takes 4+ hours so it's a challenge to keep golfers focused all the way through.

Golf course architect Tom Doak compares Shadow Creek favorably to another late 1980s mega-course, Sherwood Forest in Thousand Oaks, California, a Jack Nicklaus design for billionaire David Murdock where Will Smith, Wayne Gretzky, and Joe Montana are members. Sherwood Forest is extraordinarily beautiful but tends to wear out golfers mentally by about the 15th hole.

@SS - thanks, that's interesting. Internet says Sherwood Forest is a mere 105 scenic acres (we have a farm in Virginia that big) while Shadow Creek is a bigger 350 acres, hence for nature lovers Shadow Creek should be better and less busy (100 acres is not that big, based on our farm).

Bonus trivia: the Parker ranch in Hawaii is 250k private acres, which I've visited (Dole grows pineapples there), while a ranch in Australia, Anna Creek, is 6M acres, larger than the state of Israel. At one point the USA also gave away land for nearly nothing, a mentality that still exists in the so-called 'free market' US West.

Shadow Creek Golf Course is a giant hole in the ground outside Las Vegas. Steve Wynn wanted a golf course that wouldn't remind him he is in Nevada, so they dug a half square mile hole in the ground 60 feet deep. Then they built up hills (but less than 60' tall) in the hole and planted them with forests to look like the pine hills of North Carolina. You can't see the floor of the desert from anywhere on the golf course.

Sherwood Forest Country Club is where Erroll Flynn's "Robin Hood" was filmed in 1938: on the north slope of the Santa Monica Mountains, it's close to being the most deciduous-forested lowland spot in Southern California. They saved many of the oak trees that had to come out so fairways could be built, and moved the big old trees to the rough. So the course is narrow and punishing if you hit it into the woods. Narrow fairways have gone out of style since the 1990s, but Sherwood Forest remains a classic of 1980s big money golf course design.

Shadow Creek:

http://www.shadowcreek.com/

Sherwood Country Club:

https://www.sherwoodcc.com/default.aspx?p=DynamicModule&pageid=347849&ssid=251238

Good art is like pornography: I can't describe it but I know it when I see it.

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No, the top end of the modern arts market is not a prediction market. It's a tax doging/money laundering/getting around capital controls market for rich people.

http://www.unz.com/isteve/why-billionaires-buy-so-many-paintings/

One piece of the puzzle, apparently, is a lucrative tax break on federal capital gains taxes if you roll your winnings on buying a painting over into buying other paintings. You can evade paying capital gains taxes for the rest of your life if you keep buying more paintings. But if your first score was a painting, you have to keep buying paintings.

So this means the art (painting) bubble stays permanently inflated (at least until a catastrophic popping), because rich guys who made money in paintings in the past have to keep plowing their winnings back into buying more paintings, or they’ll have to write a big check to the IRS. They can’t reinvest their capital gains into baseball cards or dinosaur fossils or, God forbid, a factory.

Note: Don't take tax advice from me.

"Note: Don't take tax advice from me".

That's a very sensible disclaimer, particularly given the fact that the Tax Cuts and Jobs Act amended IRC section 1031 so that it is now applicable only to real estate. Previously, section 1031, which addresses so-called "like-kind exchanges" was the provision previously relied on to defer capital gains tax on works of art and other collectibles. Billionaire US art collectors can thank fellow billionaire Donald Trump for that one.

BTW, there is a special (higher) federal maximum capital gains tax rate of 28 percent for collectibles. Significant gain on the sale of an artwork would also be subject to the 3.8 percent Medicare surcharge on investment income.

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An example of money laundering was the 2013 purchase of Basquiat's "Dustheads" for $48 million. It turned out it was bought by Jho Low who was stealing a few billion from the Malaysian sovereign wealth fund and needed ways to convert bank balances into easily transportable objects.

Jho Low bought another Basquiat for $9 million and gave it to Leonardo DiCaprio.

http://www.unz.com/isteve/crazy-corrupt-asians/

@ SS - I think Leonardo gave the gifts back, as did supermodel Miranda Kerr. I read the WSJ authors book on 1MDB scandal, and they point out the scandal was almost pulled off successfully if it wasn't for that white woman environmentalist making noise that got the US FBI involved, since the Chinese, in exchange for "Belt and Road" influence, were planning to cover the 1MDB fraudulent $4B in losses (there's even a YouTube on this, at China Explained). JLo was by implication working for the Chinese. He's alive and well in Phuket Thailand, in his yacht, untouched, last I heard. 1MDB would make a good movie, it also involves a young DC-based Saudi embassy official (not Khoshoggi but an official on the take).

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A separate but related artistic tax dodge: if you buy an expensive painting in another state and bring it into your home state, you might owe a "use tax". But you can reduce or eliminate that tax by lending the painting before bringing it home, and Oregon seems to do for use taxes what Delaware does for corporations: a surprising stream of paintings gets displayed in Eugene and Portland thanks to these tax breaks.

I went to see Francis Bacon's "Lucian Freud" painting when it was at the Portland Art Museum. Worth $142M? yo's take on the market for art may have some merit.

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Dude, these are conversations between “white male nerd types” on all sides...

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The Hockney swimming pool picture that went for $90 million recently is the prettiest of Hockney's pool pictures. Most were painted in Los Angeles but this one was painted in the south of France, which is greener and more beautiful than L.A. The painting is also very gay, but in a restrained fashion.

But, still ...

A lot of what billionaires are betting on is who will be rich in the near future. Hockney, for example, tends to appeal to gays, Englishmen, Los Angelenos, and conservatives. (I wouldn't be surprised if the unknown buyer checked off a couple of those boxes.) If the type of people to whom Hockney appeals prosper, then this might prove a lucrative investment.

Another example: the extremely high prices for Klimt's painting in recent years reflect in part, that while Klimt wasn't Jewish, many of his patrons were and he was very good at making Jewish ladies look glamorous. There are a lot of Jewish billionaires, so Klimt's painting sell for a lot.

Jho Low was the classic Asian Guy Who Likes Rap, so he paid vast sums for Basquiat paintings.

It's interesting that contemporary art is dominated by homosexual artists, something that wasn't really the case in the pre-photographic era. Seventeenth century artists were masculine technicians capable of mastering a manual craft that required highly-developed skills, especially in portraiture. Increasingly, photography made those skills economically obsolescent. The manual talent needed to be successful in art became secondary to concepts. Perhaps as an aspect of their particular world views homosexuals gravitate toward more toward the abstract than the realistic.

The classic 50s New York abstract artists tended to be hard-drinking, womanizing he-men. See Scorsese's short film with Nick Nolte as an abstract expressionist in the anthology movie New York Stories, or Ed Harris in "Pollock."

Gays like Warhol and Johns made pictures of stuff -- Campbell's soup fans or American flags -- fashionable again. Hockney is pretty much a realist who paints attractive pictures of recognizable things like swimming pools.

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Here's the Hockney pool picture that set a record for highest auction price for a living artist recently:

https://www.christies.com/media-library/images/features/articles/2018/09/04/david-hockney-portrait-of-an-artist-pool-with-two-figures/davidhockneyb1937portraitofanartistpoolwithtwofigures19722400.jpg?width=383&quality=70

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The "white male nerd types" market is interesting.

In 1976 I went to a showing of Magritte's surrealist painting at the Rice U. museum, which consisted of a metal quonset hut in the parking lot of the Rice football stadium. As a white male nerd type, I wondered: "Why aren't these wonderful paintings in a real museum made out of marble?"

In 1993 I went to a sold-out show of Magritte at the marble Art Institute of Chicago. First I attended a lecture on Magritte. Afterwards I asked the lecturer why Magritte was being shown in a Quonset hut in 1976 and in a marble palace in 1993. The lecturer said that we used to think of Magritte as a commercial artist in Brussels but we've recently learned that he spent 1927-1930 in Paris hanging out with famous painters. She explained, "But it's not like art history is about who knows whom ..." but then she got a dismayed look on her face as she realized, yeah, that's pretty much what art history is about.

I replied, "With all the new tech billionaires, do you think we'll ever be attending an M.C. Escher retrospective at the Art Institute?" I was thinking of the nerd classic book "Godel, Escher, Bach." She got very offended by that suggestion. Magritte was one thing, but Escher was beyond conception.

The funny thing is that Escher still hasn't taken off in the art auctions as far as I can tell. While Magritte has sold for 8 figures, I can't find any prices for Escher, perhaps because he didn't try hard to limit his reproductions.

@SS - Sothebyes website shows several works by Escher for 50k to 120k USD, while, as you say, Magritte's oeuvre (now there's a gay word) is much more limited, and I only found one past work auctioned, but for a mere $5k ("la philosophie et la peinture de rené magritte")

Bonus trivia: this is not a troll post, it's a real reply to SS masquerading as a troll post.

I went to the Escher exhibit in the new wing of the National Gallery a few years ago.

I tried to read "Godel Escher Bach" a couple of times but I knew more about Godel and Bach than the authors, so I got bored with those parts, and as for the Escher part, well, one spends one's time more profitably looking at the pictures.

Good stuff (the Escher pictures, particularly the ones with the least amount of architecture and the greatest amount of water and animals), but like Norman Rockwell, Picasso, and of course Warhol and Basquiat, you feel sad, as a decent human being undiscombobulated by the fashions of art, knowing they mostly wasted their lives in Spergerville, without any real connections to the world God made or to their fellow human beings.
You want to talk them heart to heart and say "draw not what you pretend to see, draw what is there!!!" but of course it is too late to do that, in this world.

All good investments though, back in the day, and probably today too.

For example, look at one of the 20 or 30 best Rembrandt portraits, then look at Picasso's best efforts at painting a human face.

Rembrandt was a man and an artist, Picasso at his best looks like a cartoonist, or a gifted academic pasticheur, next to him.

Was it Picasso's childish world-view, his lack of personal virtue, his greed for money and his excitement at making money?

God only knows.

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Analogously, many Russians of our day believe that the novels of Dostoevsky are fundamentally flawed, because (a) he was not a very kind person and (b) his opinions on many subjects were deeply flawed.

Well...

Some people think there is good art, and art that is less good.
But really, when you think about it, there is only incompetent and soulless art, and competent and human art.
But .... there is no good art, in the real sense of the word.
Don't believe me?

Go to an old folk's home, and offer to walk down a few suburban streets with someone who lives there, on a wintry night when the Christmas lights are lit, and shining beautifully in the winter night, offer to do that with any one of the old people who want to walk down such a street with you.

Then, the next day, tell me their story, paint me a picture depicting one of the best days in their life, and sing to me a song that only they could sing.

Picasso could not do that, Rembrandt could not do that, Shakespeare could not do that. Trust me, I have thought about this for a long time.

The world - the world people we care about live in - is art. What we call art is, even at its best, at the most --- at its best --- simply something that reflects the world in a not completely incompetent way, in a not completely mechanical way.

Tell me you know about a counterexample and I will tell you that you were in the right place at the right time, but the fact you once saw and understood a real work of art does not mean that much to someone who was not there and then with you

walking down that street, that night, when the Christmas lights were not only the Platonic ideal of Christmas lights, but they were
red green violet orange
and full of life
as only the angels know life
or

as only those who listen to the angels know life

even poor Shakespeare did not listen to the angels much
can you imagine if he had?

ditto Rembrandt, Michelangelo

so you see, if I could have told Picasso what he needed to do to be a better artist, and if he would have listened to me ....

that, my friends, would be art worth looking at

Keter
Chokmah
Binah
Hesed

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My guess is that Escher didn't follow strategies to maximize the scarcity value of his works. He liked making prints and seeing them widely dispersed. One pair of his prints was recently auctioned off at a premium because they came with a copy of 1950s correspondence between the collector and Escher, with Escher explaining in a letter that his prints were $20 each plus $2 shipping and handling, and the collector sending back a check for $42.

That's a cute story but it also helps explain why Escher's works still don't sell for much relative to his fame and to the wealth of people who like Escher's works. He was in the business of selling multiple copies of prints, not of doing unique pieces of art for collectors.

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People who like prediction markets (no need to repeat your slur) have no problem with how the art market judges value, they just don't like art. If they want to exploit pricing inefficiencies, there are more liquid ways to do this: momentum stocks, cryptocurrencies, etc.

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Art does not have objective measurable value. If it did, it would science, not art.

The *perceived* value of a piece of art can vary drastically between people. One person can like a painting which reminds them of their childhood. Another can like a painting which flatters their idiosyncratic ideas about which direction high culture should go. Another is flush with billions in cash, but lacks a reputation for taste and culture, and so buys whatever they think (rightly or wrongly) will mark them as cultured in other people's eyes.

Hmmmm.... One can objectively compare art, particularly by triangulation. One can, with some skill, estimate its current market value by RANGE - dealers are relatively good at it. But doing so requires a rather great deal of knowledge of the pieces in the inventory whether on market or not. When talking of rarities (culturally, technically, or aesthetically significant pieces, or pieces from an artist), one has to understand the liquidity of customers and their incentives. Houses are less ridiculous, and more likely to take a loss, but follow the same general rules. Fashion less ridiculous than houses, but following the same general rules. Ergo, "All Stereotypes Are True", "Class Stereotypes Are True", "Taste Stereotypes Are True", and one need only understand the relationship between Stereotype, Available Inventory, and Current Economic Conditions within that Stereotype. As in all economic questions, the more predictable the price range the lower the value of the service, commodity, product, item. Signal Value is Costly Regardless of Class.

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Have to echo much of the comments in this thread. Art doesn't really have a good negative feedback where if the market chooses badly, reality disciplines the market. Instead you probably have a feedback of money and interest following art that has already attracted interest and money.

Art markets can have a "good" of generating art that is surrounded by a lot of commentary and information, and so probably art which is more criticizable and interpretable since there's a big body of criticism and interpretation to draw from. But I am a skeptic at their properties at actually selecting artworks that are at root better or more interesting in some objective sense.

Markets also generate strategies to obtain high value art that has not been on the market for a long time and could appear undervalued. Which probably involve investing in provocative and unusual works, within the limits of being reasonably practical to trade, whether they have much apparent merit in ideas and technique to you or not.

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"Think of art markets, and art collecting, as an ongoing debate over what is beautiful and also what is culturally important. "

Maybe I haven't kept close enough track, but when did beauty become a goal of contemporary art and no longer derided as superficial, bourgeois, obsolete, etc? And culturally important? What is the last painting or sculpture to even be known (let alone admired) by more than the tiniest fraction of the population? Which active living artists are household names? Or even -- which artists or works have had broad influence in mass produced objects (in architecture, industrial design, decor, advertising, etc?)

It seems to me that contemporary art (like contemporary poetry) has retreated into a small, isolated niche with almost no broader cultural impact or importance. The rare exceptions I can think of (Shepard Fairey's 'Hope' poster) are pretty thin gruel. Which isn't to say the modern world is devoid of art and beauty -- we're awash it in, but there seems to be almost no connection with the stuff that billionaires buy and hang on their walls.

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This is very cheeky, and I love the premise, but I’m not entirely convinced - please link Robin’s response when he makes it :)

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The market is not very liquid. Museums can frequently take works out of circulation and aide in making markets illiquid. Changes in the tax code could collapse the market but because the players are wealthy and influential that is unlikely to happen.

You could create enterprises that invested in art. Buy shares in companies that buy art. Then you could short art portfolios etc. But the fact that no such investment opportunities exist implies that the art market might not be rational. No art investor has created an enterprise that sells shares in his art portfolio as a way to allow investors to gain from the owner's expertise in buying art.

The market is not very liquid.

Yes. This makes any theoretical musings about the art market based on economic theory dubious. It's a thin market.

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Haha surely the difference is that prediction markets can be used to predict something that we care about while art auctions just predict... how expensive art is?

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It's a Keynesian beauty contest, but the contestants are ugly old ladies with disfiguring scars.

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There are several examples of individuals (such as Saatchi) buying low, inflating the value, then selling beneath market prices. The reputation/career of the artist, often tied to the value of the work, also plummets. Some artists, such as Damien Hirst, worked with collectors/investors to re-purchase his work at the inflated value when it was dumped onto the market in order to maintain the high prices his name could demand.

There are formulas for how to become an successful artist, and most of it is insider influence: the artist having the right pedigree/bio allows certain collectors/gallerists making sure the artist is in the right museum at the right age. Oddly enough, the "quality" or "beauty" or "cultural relevance" of the work matters very little as the recognition of the artist's name (brand) tends to sway valuation and acceptance.

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Look at what a hundred bucks will buy you.
http://www.thehistoryblog.com/archives/53479

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Artists don't produce art with an audience and a market in mind, mostly. They do it for self-therapy, often out of misanthropy. This is why most full time artists are very poor.

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If the Art World, whatever that is in 2018, wants my love how about they produce something like art for a change?

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Many white men are still motivated by the Nazi terror against decadent art. Look at the comments from Tyler's correspondents about Steve Sailer stereotyping stylish "Gays" and ugly "Jews".

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Tangential, but I quite enjoyed The $12M Stuffed Shark for understanding art pricing. Discusses the comparison of art to other luxury, branded items. Now, excuse me, it's time to flip my $75K Birkin bag...

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This doesn't really make sense. The enthusiasm for prediction markets isn't in tension with skepticism of the art market/world because they are making different kinds of claims.

Enthusiasm for prediction markets is a belief that such markets are *useful* for predicting various facts/events. No one believes prediction markets are desirable in and of themselves. If we don't care about knowing the thing that market is predicting then the market isn't useful. No one is pushing for prediction markets about my annual mucus production.

In contrast skepticism about the art markets or art world is skepticism that such art offers real net social utility and a suspicion that it is mostly a complex status game. You may not find such arguments convincing but there is nothing about them that is incompatible with enthusiasm for prediction markets...they are just claiming not to be interested in predicting the future willingness of people to pay for art.

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