The Subjectivity of Wine: Insights from Economic Research

Research surrounding wine often focuses on two main areas: subjective perceptions of taste and its economic aspects, primarily its pricing as a commodity. While statistical studies struggle to establish a clear relationship between wine quality and taste, economic examinations consider its inherent value as a drink.

The Role of Subjectivity in Wine Value

Subjectivity plays a crucial role in how consumers perceive wine. The narrative attached to a bottle—often influenced by its price—can drastically shape an individual’s tasting experience. A £100 bottle, for example, might be perceived as superior to a £10 bottle even before tasting, due to preconceptions influenced by its cost. This unique characteristic classifies wine as a Veblen good, where desire is intricately linked to price and biases.

Wine as an Asset Class

The complexities of wine as an investment are highlighted by recent research from Robbe Van Tillo and Gertjan Verdickt of Katholieke Universiteit Leuven. Their study draws parallels between wine and corporate bonds, noting that both have ratings, defined timeframes (drinking windows), and market risks such as spoilage and liquidity concerns.

Behavioral Economics and Wine Auctions

One significant finding from the study is the presence of selection neglect—a concept from behavioral economics where individuals misinterpret data based on incomplete information. In wine auctions, bidders may overestimate value by focusing solely on successful sales, neglecting the unsold lots, which often represent lower valuations.

The research analyzed an extensive database of 3.3 million sales over nearly twenty years, excluding wines priced below $20 and above $50,000. It found that the average bottle fetched $608.51 at auctions, with an average Wine Advocate score of 93.93. However, the relationship between auction price and expert ratings was surprisingly weak.

Key Findings and Implications

The study revealed that higher-rated wines do not necessarily yield higher returns for investors. In fact, wines with elevated scores returned less on average, suggesting that expert opinions may not hold significant weight for price appreciation. The concept of latent pricing, derived from unsold lots, helps establish a theoretical fair value for wines, indicating how liquidity influences price discovery.

Market Behavior and Price Dynamics

Wine auctions, due to their limited turnover of specific vintages, can distort valuations. The findings suggest that bidders tend to ignore negative information, especially in markets characterized by a culture of quick wealth accumulation, such as the United States.

Notably, wines that have been traded more than once in the past year tend to align more closely with their latent prices, pointing to the impact of sustained market activity on price accuracy.

Investment Strategies for Wine Collectors

Considering the insights from the study, investors are advised to adopt a more selective approach when purchasing wine. Focus should be placed on lower-priced wines that have experienced limited trading activity, as these are often more susceptible to selection biases and may yield greater returns when sold to enthusiastic collectors.

Furthermore, collecting from the lower quintile of mispriced wines could enhance returns significantly, suggesting that traditional rating systems should be approached with caution.

Conclusions on Wine Investment

While the study does not explicitly position wine as a straightforward investment avenue, it does highlight its complexities as an asset class. With a decent average return of 1.8% monthly and the risks associated with liquidity, strategic buying and a keen awareness of market sentiment are essential for success in wine investment. The findings echo the reality that both wine and other less conventional asset classes, such as junk bonds, require careful analysis to navigate inherent biases and optimize returns.

In summary, engaging with the wine market as an investment requires a nuanced understanding of the subjective opinions that shape pricing, an awareness of market dynamics, and a willingness to explore undervalued options.