The Economics of Wine (Orley Ashenfelter, Princeton)

What does an economist know about wine? Given that many wines need years to mature, how can one predict which ones will be great or not?

Princeton’s Orley Ashenfelter explains how he used economic principles and regression analysis to predict wine quality (and score great deals!). His research helped spawn an entire field dedicated to the economics of wine.

This video is based on the following paper:

Predicting the Quality and Prices of Bordeaux Wines By Orley Ashenfelter
https://www.researchgate.net/publication/4891174_Predicting_the_Quality_and_Prices_of_Bordeaux_Wine

More of Orley Ashenfelter’s work: https://irs.princeton.edu/people/orley-c-ashenfelter

Orley Ashenfelter’s vineyard: https://cedarrosevineyards.com/

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- [Orley] I got involved in it,
interestingly enough

because I couldn't really afford
the wines that I wanted to buy,

so I was trying to figure an angle,
a quantitative angle

that would let me do something,

buy some things
that I couldn't normally afford.

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- [Reporter] There's some
controversy fermenting

within the wine community.

At its center is an economist
who claims he can analyze

fine wines without ever
savoring a drop.

- [Interviewer] Why did you even
get involved in this?

I mean you're an economist.

- Wine is what people call
an experience good.

You go to the store,
and you look at all these bottles,

and you don't know what
it's going to taste like.

You don't know what it's like
until you open it.

Then it's too late
if you made a mistake.

So even though it's incredibly
difficult for people

to tell wines apart,

it's much more difficult
than people realize.

There are nevertheless
price differences

that clearly are in part justified
by the quality differences.

I was trying to figure out how
to learn about quality differences

and to do that at a point where
prices really hadn't fully adjusted

to the observed quality
of the wines.

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- [Reporter] They spend any more
than 20 bucks for a bottle,

30, 40, 50 -- what's the difference
and is it really worth

what you're getting inside --
how do you know?

- What's in the bottle is the key,

and what's in the bottle
really depends on

what kind of grapes you have.

I learned that you could predict
what the ultimate quality

of the wine will be
from the weather

that created the vintage itself.

A vintage is all the wines
that are produced

from a particular growing season.

You like to have a dry end
of a growing season,

and then you need to have
a growing season to be warm enough

so that you can get
the grapes right.

In places where you don't irrigate,

it's nice to have a lot
of rain in the winter.

So we can explain quite
a lot on the prices of the wines

after they've become mature,
when they're drinkable.

Bordeaux wines, in particular,
are not so interesting

when they're really young.

They start to become interesting
when they're about ten years old.

People collect them,
fancy restaurants have them.

You always buy old wines, you can
go to the auctions and buy them.

Here I could predict the prices
of the older wines

using the weather.

The thing of it is it made such
a fantastic example in econometrics

because there is no question
about causality.

There's no question that
the weather must affect the prices.

The prices certainly
didn't change the weather.

So it's one of those examples
where regression analysis

is totally justified
and actually quite successful.

Now here's where
the anomaly comes in.

The vintages, when
they come on the market --

the farmers have
the same costs every year,

so they would like
to get the same price

for the grapes every year.

If the vintages
really differ in quality,

it doesn't make sense that
that should be true.

So what they do is
they have a very grand scheme

for keeping the prices stable
when they're young.

What that means is
if you're willing to keep

the wines for ten years,
and if you know what the weather was

when they created the vintage,
you can buy the ones

that are underpriced
as opposed to the ones

that have to be overpriced
to make this average come out.

♪ [music] ♪

Once I know what it is
about the weather

that makes wines made
from a certain kind of grape good,

then I can ask myself, well,
there are probably many places

where these grapes are not planted,
what would be a good place?

And the answer to that question is,
well, one that has the weather

that matches what
a good vintage would look like.

Let's say we're talking
about the Cabernet type of grapes

that are grown in Bordeaux.

South Jersey has temperatures
just like in Bordeaux.

I planted grapes in New Jersey.

It was kind of a shocking idea.

We do have vintage variability
from year to year --

we have a little bit
more rain than they do.

But this year we had
a fantastic vintage.

It was my first crop
that I had 35,000 pounds

of incredibly good,
beautiful red grapes

that are going to make
some really good wine.

This has now become
an actual subject,

the economics of wine.

There's a thing called

the American Association
of Wine Economists --

has meetings every year.

It's really an attempt to focus
on a very special area

so that you can think
about bigger problems.

Basically, once you get started
on something like that,

the number of uses for it
becomes phenomenal.

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