Skip to main content

Mathematics and wine



The wine futures market hinges on predicting the price of wine long after its been placed in barrels to aid the aging process. And the price of wine hinges on the taste of the aged wine before it becomes aged. And the tasting hinges on the palate of so-called expert wine connoisseurs. What an inefficient predictive model!



Tristan Fletcher of the University College in London thinks the predictive model is inefficient too, and wants to change it, using the application of artificial intelligence (AI) – i.e. the application of mathematics and wine (The Economist, August 8, 2015).

Previous mathematics and wine analyses were based on linear regression models. Linear regression (I hope my students remember this) applies factors related to specific vintages – such as weather, soil, precipitation, history and so on – and plots these on a graph over time to form a straight line that approximates the price. Pick a point and there’s an approximated price (this is where the term ‘price point’ comes from). I would have used this model too. But Fletcher has another model.

Instead of regression, Fletcher applies AI. AI uses correlations – instead of a straight line, the result is price curve, which Fletcher believes yields stronger predictions. To do this, Fletcher needed a lot of information. He gathered the information from the Liv-ex100, which is the global marketplace for professional buyers and sellers of fine wine. He looked only at the historical price information of lots of wines. He found two distinct groups (published in the Journal of Wine Economics).

Half of the wines Fletcher had information on fluctuated in price over short periods, settling towards the mean return quickly – he called this the calm group. The other half of the wines trended up and down more erratically over longer periods. Therefore Fletcher conducted two types of AI (computer-based) algorithms, one on each group, and compared them to the results of the linear regression model.

The calm group under the AI algorithm produced similar results to the linear regression model (it actually out-performed it a little, but not significantly). The erratic group under the AI algorithm outperformed the linear regression model – and this is the group where wine speculators could make more money on the futures market.


But let’s remember that this is the futures market. This is the ‘speculative game’ of agreeing to buy and sell an asset (in this case, wine) at a certain date in the future at a certain price. This price must be honoured (it must be paid) whether the price goes up or down. The buyer must take the wine at that date at that price. Even with mathematical models, the price can still be volatile and risky. Wine in the futures market, like all else in the futures market, is still a risky business.


Labels:

Comments

Post a Comment

Popular posts from this blog

Pir-E-Kamil - The Perfect Mentor by Umera Ahmed: book review

The Perfect Mentor pbuh  (2011) is set in Lahore and Islamabad in Pakistan. The novel commences with Imama Mubeen in medical university. She wants to be an eye specialist. Her parents have arranged for her to marry her first cousin Asjad. Salar Sikander, her neighbour, is 18 years old with an IQ of 150+ and a photographic memory. He has long hair tied in a ponytail. He imbibes alcohol, treats women disrespectfully and is generally a “weird chap” and a rude, belligerent teenager. In the past three years he has tried to commit suicide three times. He tries again. Imama and her brother, Waseem, answer the servant’s call to help Salar. They stop the bleeding from his wrist and save his life. Imama and Asjad have been engaged for three years, because she wants to finish her studies first. Imama is really delaying her marriage to Asjad because she loves Jalal Ansar. She proposes to him and he says yes. But he knows his parents won’t agree, nor will Imama’s parents. ...
1 comment
Read more

Flaws in the Glass, a self-portrait by Patrick White: book review

The manuscript, Flaws in the Glass (1981), is Patrick Victor Martindale White’s autobiography. White, born in 1912 in England, migrated to Sydney, Australia, when he was six months old. For three years, at the age of 20, he studied French and German literature at King’s College at the University of Cambridge in England. Throughout his life, he published 12 novels. In 1957 he won the inaugural Miles Franklin Literary Award for Voss, published in 1956. In 1961, Riders in the Chariot became a best-seller, winning the Miles Franklin Literary Award. In 1973, he was the first Australian author to be awarded the Nobel Prize for Literature for The Eye of the Storm, despite many critics describing his works as ‘un-Australian’ and himself as ‘Australia’s most unreadable novelist.’ In 1979, The Twyborn Affair was short-listed for the Booker Prize, but he withdrew it from the competition to give younger writers the opportunity to win the award. His autobiography, Flaws in the Glass...
Post a Comment
Read more

Sister cities discussed: Canberra and Islamabad

Two months ago, in March 2015, Australia and Pakistan agreed to explore ways to deepen ties. The relationship between Australia and Pakistan has been strong for decades, and the two countries continue to keep dialogues open. The annual bilateral discussions were held in Australia in March to continue engagements on a wide range of matters of mutual interest. The Pakistan delegation discussed points of interest will include sports, agriculture, economic growth, trade, border protection, business, and education. The possible twinning of the cities of Canberra, the capital of Australia, and Islamabad, the capital of Pakistan, were also on the agenda (i.e. called twin towns or sister cities). Sister City relationships are twinning arrangements that build friendships as well as government, business, culture, and community linkages. Canberra currently has international Sister City relationships with Beijing in China and Nara in Japan. One example of existing...
1 comment
Read more