How should a behavioral finance proponent buy wine?  One basic point of research in behavioral finance is that there are exploitable arbitrage opportunities in free markets.

Richard Thaler is one of the founding fathers of behavioral finance.  He is also a wine aficionado.   According to this old article in Wine Spectator, Thaler applies his research to his hobby.  Acutely aware of the winner’s curse – overpaying for an object at auction – he makes bids by fax rather than turning up at the live auction.  He’s scared of getting carried away by the thrill of winning and overpaying for the wine.  The faxed bid can be more thought out and less emotional.  He also does not go by ratings as he does not believe anyone can forecast how wine will age, just like Jim Cramer can’t know what the future holds for the stocks.  Thaler does not buy wine futures, suggesting they are overpriced like IPOs in financial markets.  Nice simple translations to employ by yourself when you buy wine.

The usual economist counterpoint to behavioral finance is that arbitrage opportunities can’t survive in the long run because rational investors would enter and prices would change till arbitrage is impossible.  Behavioral finance is predicated on the idea that this is simply not true for some reason.  I hope this translates into wine markets too as I am following Thaler’s advice for my own modest collection.  Unlike stocks and bonds, even if I’m wrong, at least I can drink the wine and enjoy it.   All you can do with your G.M. stock is use it to light a fire.