Professor Karl Storchmann: Wine Economist

Professor Storchmann Source: Twitter.

by Michael Nip and Maria Verbaite

April 30th, 2015

Karl Storchmann is a Clinical Professor of Economics at New York University. Outside of the university, he is also involved with the American Association for Wine Economists as one of its Board members and currently serves as the Managing Editor for The Journal of Wine Economics. Presently, his research interest within the realms of wine economics is focused on the relationship between climate change and wine prices and how one impacts the other. The following interview will present a closer look at Storchmann’s interests, involvement, and views of wine economics today.

“Where does your interest in wine economics originate from? How did you first get involved with wine research?”

“During the 1990s, I worked as a senior economist in the Rhine-Westphalian Institute for Economic Research (RWI Essen), a think tank in Germany, and did quantitative research in transportation economics. At the same time, I was increasingly fascinated by wine and bought a little vineyard on the Mosel. In the late 1990s, it was Princeton economist Orley Ashenfelter who introduced me to “wine economics.” He took me to the annual meetings of the so-called Vineyard Data Quantification Society, a group of about 30 fellow wine-enthusiastic economists and statisticians, that holds annual conferences at various exciting places, such as Budapest, Napa, Dijon or Bordeaux, to present their wine-related research. I quickly became part of the group and contributed with my own wine economic research.”

“How did you get involved with and what is your role in the American Association for Wine Economists?”

“In 1999, I moved to the U.S. First UCLA, then Yale, and later to Whitman College, located in a prime wine growing region in Walla Walla, Washington. In 2005, with the financial support of Whitman College, I co-founded the American Association of Wine Economists AAWE (www.wine-economics.org) and became the managing editor of its publication, the Journal of Wine Economics. My co-founders and co-editors have been Orley Ashenfelter (Princeton), Kym Anderson (Adelaide), Victor Ginsburgh (Brussels) and Robert Stavins (Harvard). I have also been the vice president of the AAWE.

“Over the last 10 years, AAWE and the JWE have grown rapidly. At our annual conferences – this year’s conference will be held in Argentina – we have about 110 to 140 presentations on all aspects of wine economics. The Journal of Wine Economics, meanwhile produced and distributed by Cambridge University Press, is available in more than 3000 libraries worldwide. Currently, we are working on the first issue of volume number 10,which will be released in early May 2015.”

“In your opinion, how does wine economics differ from other fields in economics?”

“Fine wine has a few characteristics that differentiate it from other agricultural commodities and beverages, rendering it an interesting topic for economists. Fine wine can regularly fetch bottle prices that exceed several thousand dollars. It can be stored for a long time and can increase in value with age. This has given rise to a large body of finance-related research on the prospects of wine as an investment good.

“Fine-wine quality and prices are extraordinarily sensitive to fluctuations in the weather of the year in which the grapes were grown. It is therefore an ideal crop to study the impacts of climate change on profits or land values.

“Wine is an experience good, that is, its quality cannot be ascertained before consumption. As a result, consumers often rely on ‘expert opinion’ regarding quality and maturation prospects. A growing body of papers has analyzed whether experts are competent, biased and even fraudulent. In many respects, wine critics are not that much different from credit rating agencies, which are also paid by the very companies or countries they rate.”

“Do you find that you have to be well-versed in the markets for other commodities that wine is comprised of as well as the unique physical features of different wine regions to approach research in wine economics appropriately?”

“That depends on the focus of your research. If you work on wine and climate change it is helpful to know something about vines and how they react to heat and water stress. You need to know something about the physical environment, what the French like to call ‘terroir’ – that is, the microclimates, soils, aspects and slopes of the vineyards.

“If you want to evaluate the cost of climate change on viticulture, you need to know the requirements of certain varietals. Some types of grapes thrive better in warmer climates and others prefer colder climates.”

“What, in your opinion, are the most interesting findings in wine economics thus far?”

“We have published many papers that are of interest not only to wine enthusiasts but also to the non-wine public as they analyze issues that extend beyond wine. One of them is the role of experts in the economy. Do they really know more that laymen? Are they unbiased? Robert Hodgson, a statistician and head judge of the California Wine Fair, analyzed the performance of wine judges at a major U.S. wine competition from 2005 to 2008 (Hodgson, 2008). At these wine competitions, panels of four wine judges assess samples of about 30 wines and award medals (Gold, Silver and Bronze) to excellent wines. Unknown to the judges, Hodgson inserted triplet pours of one bottle into the sample, that is, three of the 30 wines within one flight were identical. Only 10% of the judges were able to rank these wines within the same medal rank; another 10% assessed the triplet wines within a two-medal range, that is, 80% of the examined judges ranked identical wine more than two medal ranks apart. In addition, even the 10% of judges who assigned the same quality rank to identical wines were unable to repeat this performance the following year. These results suggest that experts award medals at random.

“This conclusion finds further support in a second study by Hodgson (2009). Hodgson, a wine-maker himself, observed that wines entered into several competitions rarely received identical evaluations in each of them. A wine might obtain a Gold medal in one competition and nothing in another. If a Gold medal were a good predictor for quality, then the probability of receiving a Gold medal at competition B should not be independent of whether this wine already obtained a Gold at competition A. In fact, a wine that receives a Gold at competition A should have a higher than random chance of obtaining a Gold at competition B.

“However, Hodgson found that this is not the case. The probability of obtaining a Gold medal at competition B is stochastically independent and follows the binomial probability distribution. For instance, if the chance of receiving a Gold at any competition was 10% and if the distribution of Gold medals was random (i.e. independent of quality), the chance of receiving two Gold medals would equal 0.1 * 0.1 = 0.01. Hodgson found that this is the case for wine competitions and states: “that chance alone may account for the number of Gold medals that a wine receives” (2009, p. 8).

“However, expert opinion does not suffer only from a lack of expertise. Sometimes conflicts of interest can result in biased outcomes. Reuter (2009) examined whether wineries that advertise in Wine Spectator receive better critical evaluations of their wines. He exploited the fact that the other large wine magazine, Wine Advocate, does not accept winery advertising. Although advertisers and non-advertisers obtain similar ratings, when he controlled for quality by referring to Wine Advocate ratings, Reuter (2009) found that advertisers receive almost one more critical point than do non-advertisers. The effect seems largely due to a higher chance of being ‘retasted.’ When a blind tasting yields unexpected results, Wine Spectator allows a retasting, that is, the wine will be added to the next flight and thus ‘gets a second chance.’ It appears that advertisers obtain this opportunity more frequently than non-advertisers.

“But, even worse, Robin Goldstein (2008) reported that, in addition to being flawed or biased, expert opinion can be entirely made up. Goldstein applied for the Wine Spectator Award of Excellence, which is regularly given to restaurants with an outstanding wine list. However, Goldstein has never owned nor managed a restaurant. Instead, he launched a website for a fictitious restaurant in Milan, Italy; he posted menus and two wine lists – a regular list and a reserve list. For the expensive reserve list, he mostly selected wines that received only between 50 and 70 Wine Spectator points. Wine Spectator deems wines in the 50–74-point range ‘not recommended’ and wines in the 75–79-point range “mediocre: a drinkable wine that may have minor flaws.” In order to add some credibility to his made-up restaurant, Goldstein also obtained an Italian telephone and fax number. He submitted his application, a letter and a $250 fee – and after an evaluation phase of a few weeks, he indeed received the Wine Spectator Award of Excellence. This means that Wine Spectator granted an award of distinction to a nonexistent restaurant.”

“Do you have to be a wine enthusiast in order to be a wine economist?”

“No, being a wine enthusiast is not a prerequisite, but it certainly helps. I know of people who do not drink at all, but still do wine economic research – that does exist. There is a lot of public data and information on wine, making wine an accessible area of research.”

References

Goldstein, R. 2008. What does it take to get a Wine Spectator Award of Excellence?
Blindtaste, August 15. http://blindtaste.com/2008/08/15/what-does-it-take-to-get-a-wine-spectator-award-of-excellence.
Hodgson, R.T. 2008. An examination of judge reliability at a major U.S. wine competition. Journal of Wine Economics. 3(2):105–113.
Hodgson, R.T. 2009. An analysis of the concordance among 13 U.S. wine competitions. Journal of Wine Economics. 4(1):1–9.
Reuter, J. 2009. Does advertising bias product reviews? An analysis of wine ratings. Journal of Wine Economics. 4(2):125–151.