Mark Twain wrote that Tom Sawyer “had discovered a great law of human action, namely that in order to make a man covet a thing, it is only necessary to make the thing difficult to attain.” That was true nearly 150 years ago, when whiskey was anything but coveted, referred to by popular nicknames like “coffin varnish” and “strychnine.”
Today’s Tom Sawyer would be running the marketing department at a major distillery.
Bourbon’s recent pricing explosion, particularly in the gray (secondary) market, is often attributed to the result of “supply and demand.” The insatiable thirst for Bourbon has rapidly outstripped the patience required by those crafting it, leaving a market imbalance that has little chance of being corrected until sufficient quantities of aged Bourbon hit the market. This is what barstool economists think, anyhow.
Markets are thought to operate efficiently, supply and demand continually adjusting pricing levels to points at which a willing buyer and seller will agree to a deal. When people want something “difficult to attain,” as Tom Sawyer recognized, they’ll offer to pay more for it. At some price level, sellers are enticed to sell their items. When there is plenty of that something available, or when prices reach unrealistic levels, buying desire abates and sellers will lower prices in an effort to attract buyers. This makes perfect sense and creates a natural environment for ascribing value to any object.
Except when it doesn’t.
Standard economics assumes that all decisions are rational and informed. In other words, people accurately estimate something’s value or utility. With buyers and sellers both working to maximize their own profit or experience, inefficiencies will be eliminated and market prices will be reliable. That $70 Four Roses Gift Shop bottle really is worth $450 because that’s what a willing buyer and seller agreed upon.
Behavioral economics, on the other hand, takes very different assumptions into consideration. Self-regulating market advocates often cite Adam Smith’s 1776 opus The Wealth of Nations, but few of them are even aware of his earlier book The Theory of Moral Sentiments. In Sentiments, Smith reminds economists not to ignore human behavior, emotions and feelings. In the early 1900’s, economist John Maurice Clark also warned, “The economist may attempt to ignore psychology, but it is sheer impossibility for him to ignore human nature.”
The human brain is capable of incredible feats, not the least of which is being fooled on a regular basis. We make so many poorly informed decisions daily, we don’t even realize it’s happening. Once these psychological weaknesses are identified and understood, the light bulb goes on and we feel smarter for the moment. But do we actually change our buying behavior?
Let’s start with arbitrary coherence. It’s called ‘arbitrary’ because the price can actually be set at whatever level someone chooses. The minute you consider purchasing something at that price, it becomes imprinted in your mind, and that price point becomes the anchor by which future decisions are measured. You may think $300 retail is a ridiculous price to pay for a limited edition 13-year rye whiskey from Jim Beam, but if you’re even thinking about pulling out your credit card, you’ve just fundamentally altered your perception of every bottle you buy after.
Having crossed the threshold, each additional purchase will then be compared to your anchor. “If I paid $300 for that bottle, then $325 for this bottle isn’t unreasonable,” the logic follows. You are no longer comparing limited edition bottles to the once exorbitant $90 prices you had reluctantly paid in the past. The gray market accelerates the process, facilitating more transactions at higher prices. And that, my friends, is what leads to a sourced Whistlepig rye retailing for $500.
Bourbon producers have become masters at what we’ll call ‘The Starbucks Effect.’ Once upon a time, we ordered a reasonably priced coffee from Dunkin’ Donuts or McDonalds in small, medium or large. Then along came Starbucks, with its Tall, Grande and Venti sizing, fancy bean varieties, jazzy music and exotic pastries. At some point you made the decision to pay more for their coffee (setting a new anchor). Now accustomed to a new bracket of consumption, it was a smaller leap for you to splurge on a Latte or Macchiato for $4 each. We don’t stop and consider the trade-offs, we simply continue making the same purchasing decisions we made before. Starbucks built an empire by creating enough differentiation to prevent customers from using other coffee options as anchors in their minds.
The more special or limited the release appears, the more theoretical value it holds for those lucky enough to own one. $120-150 limited editions used to be the exception, not the rule. As I type this, Brown-Forman is preparing to release less than a thousand bottles of a resurrected brand called “King of Kentucky” Bourbon for $200 each. The original King of Kentucky was anything but high end, and the new release is a decade-older version of bottom-shelf Early Times. Yet, Master Distiller Chris Morris rings the dinner bell with the magic words, “This will be very dear, very rare,” adding, “This will be hard to get.”
Let’s also consider the “Chivas Regal Effect.” As the (possibly true) story goes, Chivas Regal doubled the price of its struggling whiskey and saw sales magically double. Suddenly, consumers associated the higher price with higher quality. Universities also saw increases in enrollment once they raised their tuition costs, due to the same factors. While these psychological tricks are liable to fool just about any of us, they are far more effective on individuals who lack enough experience about a subject to separate price from quality.
On a recent visit to Buffalo Trace, I nearly spit out my white dog when I was informed that the current expansion would add thirty additional warehouses to their current sixteen. That will triple(!) the amount of whiskey currently aging there. While you still aren’t likely to find George T. Stagg at the gas station, fundamental changes are certainly on the way. The quality and quantity of regular releases will improve, including bottles on allocation. Old Weller Antique, Blanton’s, Elmer T. Lee and even Weller 12 will likely be much easier to find at reasonable prices. Will this reduce the allure of private barrel picks? At a bare minimum, we should all be comfortable with the idea that we aren’t headed for a future where an overflowing Bunker is our only hope of drinking good Bourbon.
We make mistakes with Bourbon trades as well, another area where the free market is supposed to benefit all participants. Unfortunately, we often base trading decisions on arbitrary factors such as gray market prices, hype or anticipated enjoyment. We trade bottles we’ve never opened for bottles we’ve never tried for reasons we can’t justify even to ourselves. Is it any surprise that we often find we’ve made decisions that actually worsen our situation rather than improve it? And that doesn’t even take into account the precious time you’ve wasted negotiating.
One suggestion worth contemplating is to really question each new Bourbon purchase decision before you make it. Ask yourself, “Am I about to set an anchor that will lead to a string of regrettable future Bourbon purchases?” We often ascribe more weight to prices we have paid in the past than to on our actual level of desire or demand in the present. Our mind is a formidable opponent when it comes to conquering our own irrationalities, but taking it off autopilot is the first step towards victory.
*For more on this topic, I highly recommend reading Dan Ariely’s seminal book Predictably Irrational, from which many of the ideas for this article were born.