An exciting event is likely to occur tonight in the world of art. As The Telegraph reports, a Picasso painting, “Les Femmes d’Alger,” is predicted to set a new auction record by selling for over $142 million at Christie’s New York this evening.
While a few insanely rich people haggle over a picture, the rest of us might be thinking that there is no way some weird circles and squares on canvas can be worth such a price. But most people forget about the power of subjective value, the driver of all economic exchange.
Each person determines value based on one’s own inclination toward utility (satisfaction or happiness), thus leading to prices that signify willingness to purchase. It’s the reason some people buy expensive smartphones or pricey wine, while others only by brand name groceries or thrift store clothing. And, regardless of personal wealth, people switch back and forth among these categories depending upon their individual predilections. There are lots of wealthy people who drive inexpensive cars and don’t care for fancy footwear, just as there are plenty of poorer people who drive Audis and wear Air Jordans.
Some people believe that a strange painting is worth millions, and others wouldn’t hang it in their house if it were $20 at a garage sale. Everyone’s value is subjective. This is one of the defining principles (among about a hundred) why Marxism and Keynesianism can never work. It’s impossible to organize the personal preferences of seven billion people. Even Picasso didn’t quite grasp subjectivity.
There’s an old story about Picasso that has lived on over time in a few different versions. In one, Picasso is at a cafe, chilling with his buds, when someone points to his used napkin and asks, “Can you draw an ear on this napkin?” Picasso complies. “Can you draw an eye somewhere on this napkin?” Picasso complies again. “How about a mouth?” Picasso obliges, again. “Now sign the napkin for me.” Picasso says, “Sure. That’ll be $25,000.”
“$25,000? But, it only took you two minutes to draw them!” complains the fella.
“Yes, but it took me 25 years for my signature to be worth something,” replies Picasso.
In another variation, Picasso is having a drink in a bar in Paris. He is recognized by an admirer who asks the great man if he would do a quick sketch for her on a napkin. Picasso complies, hands over the drawing and asks for a considerable amount of money in exchange.
The lady is horrified. “But that only took you five minutes,” she exclaims. Picasso leans over and in a heavy Spanish accent says, “No, dear lady. It took me forty years.”
Urban Dictionary even has an official entry for the legend: Picasso's Napkin. “This is when something of little inherent worth or value, that took little time, effort, or talent to make, and that most likely could be made by just about anyone, is produced, and yet is over-esteemed as a great work of art or over-valued at a high price simply because of a name attached to the work or the name of a person who produced it.”
In both versions, Picasso believes he has earned the right to sell his work, even his slapdash work, for a lofty sum based on who he is and his years of effort and skill. And he may be right, to a certain extent. After all, it’s why a 40-year-old can walk into a job interview and request a higher starting salary than a 20-year-old. Some may say he is just being greedy. And he may be, to a certain extent. However, there is no mathematical formula that determines what something is worth. Picasso’s napkin drawing is not worth thousands because he says so. It’s only worth thousands if the customer says so. Because if the buyer turns it down, the drawing is worthless—it will be thrown in the trash when the waiter comes by. The customer has all the power.
This is true in business, as much as it is in art. Businesses are not evil, as many choose to believe. They simply offer something they think we want, and it’s up to us to buy it, depending on our subjective value and determination of utility. If we don’t, the business must either lower the price to align with our subjective value, seek a different customer who is willing to buy, or devise alternative products. Similarly, Picasso’s painting tonight is only worth millions if someone is willing to pay millions. Otherwise, the price will come down to a more appropriate level, or if no one is interested (just as I would never be), it will go back into a warehouse somewhere.
These are the real world lessons we can take from examining art, film, literature, or anything that has been created. The next time you complain about prices of a product, remember that the price has only been set because someone out there is willing to pay it. And you have the power to shop elsewhere. In this case, I know I would. Picasso is just too weird for me.
UPDATE: Picasso's painting ended up selling for a whopping $179.4 million last night, a new record.
Each person determines value based on one’s own inclination toward utility (satisfaction or happiness), thus leading to prices that signify willingness to purchase. It’s the reason some people buy expensive smartphones or pricey wine, while others only by brand name groceries or thrift store clothing. And, regardless of personal wealth, people switch back and forth among these categories depending upon their individual predilections. There are lots of wealthy people who drive inexpensive cars and don’t care for fancy footwear, just as there are plenty of poorer people who drive Audis and wear Air Jordans.
Some people believe that a strange painting is worth millions, and others wouldn’t hang it in their house if it were $20 at a garage sale. Everyone’s value is subjective. This is one of the defining principles (among about a hundred) why Marxism and Keynesianism can never work. It’s impossible to organize the personal preferences of seven billion people. Even Picasso didn’t quite grasp subjectivity.
There’s an old story about Picasso that has lived on over time in a few different versions. In one, Picasso is at a cafe, chilling with his buds, when someone points to his used napkin and asks, “Can you draw an ear on this napkin?” Picasso complies. “Can you draw an eye somewhere on this napkin?” Picasso complies again. “How about a mouth?” Picasso obliges, again. “Now sign the napkin for me.” Picasso says, “Sure. That’ll be $25,000.”
“$25,000? But, it only took you two minutes to draw them!” complains the fella.
“Yes, but it took me 25 years for my signature to be worth something,” replies Picasso.
In another variation, Picasso is having a drink in a bar in Paris. He is recognized by an admirer who asks the great man if he would do a quick sketch for her on a napkin. Picasso complies, hands over the drawing and asks for a considerable amount of money in exchange.
The lady is horrified. “But that only took you five minutes,” she exclaims. Picasso leans over and in a heavy Spanish accent says, “No, dear lady. It took me forty years.”
Urban Dictionary even has an official entry for the legend: Picasso's Napkin. “This is when something of little inherent worth or value, that took little time, effort, or talent to make, and that most likely could be made by just about anyone, is produced, and yet is over-esteemed as a great work of art or over-valued at a high price simply because of a name attached to the work or the name of a person who produced it.”
In both versions, Picasso believes he has earned the right to sell his work, even his slapdash work, for a lofty sum based on who he is and his years of effort and skill. And he may be right, to a certain extent. After all, it’s why a 40-year-old can walk into a job interview and request a higher starting salary than a 20-year-old. Some may say he is just being greedy. And he may be, to a certain extent. However, there is no mathematical formula that determines what something is worth. Picasso’s napkin drawing is not worth thousands because he says so. It’s only worth thousands if the customer says so. Because if the buyer turns it down, the drawing is worthless—it will be thrown in the trash when the waiter comes by. The customer has all the power.
This is true in business, as much as it is in art. Businesses are not evil, as many choose to believe. They simply offer something they think we want, and it’s up to us to buy it, depending on our subjective value and determination of utility. If we don’t, the business must either lower the price to align with our subjective value, seek a different customer who is willing to buy, or devise alternative products. Similarly, Picasso’s painting tonight is only worth millions if someone is willing to pay millions. Otherwise, the price will come down to a more appropriate level, or if no one is interested (just as I would never be), it will go back into a warehouse somewhere.
These are the real world lessons we can take from examining art, film, literature, or anything that has been created. The next time you complain about prices of a product, remember that the price has only been set because someone out there is willing to pay it. And you have the power to shop elsewhere. In this case, I know I would. Picasso is just too weird for me.
UPDATE: Picasso's painting ended up selling for a whopping $179.4 million last night, a new record.