Dear Economist

When should I drink my six special bottles?

Dear Economist,
I have inherited six bottles of excellent wine, which I plan to consume, over time, on special occasions. But how do I know when to open a bottle when I don’t know what occasions lie ahead? I don’t want to use up all the bottles within a few months on mediocre occasions, but neither do I still want to be hoarding them until I die.
George Stevens

Dear George,

This is known as the “spongeworthiness” problem, after an episode of Seinfeld in which the contraceptive sponge is taken off the market. The character Elaine Benes stocks up with several hundred sponges, but then faces the same problem you do: how to decide whether a man is “spongeworthy”.

This is an option-value problem: every sponge or bottle consumed is one that cannot be used later. It has been solved by Avinash Dixit, a renowned game theorist and former president of the American Economic Association. (For some reason, Professor Dixit waited to finish his term of office before publishing his research on spongeworthiness.) Unless you are absurdly patient, you should open them more quickly than you might think.

Assuming you are patient enough to wait for a gain of 5 per cent a year – but not more – and if you have one possibly special occasion per month, Dixit calculates that you should open a bottle if you expect an occasion in the top 21 per cent of all possible occasions. As the number of bottles remaining shrinks, raise your standards. The last bottle should be consumed on an occasion in the top 9 per cent.

Of course, there is always the chance that an occasion is so special that you are tempted to open another bottle. Dixit’s analysis allows for this. After all, Elaine once told a lover that he couldn’t have a second bout: “Sorry, I can’t afford two of them.”

Also published at ft.com.

13th of August, 2010Dear Economist • Comments off