Uncertainty in the Movie Industry: Does Star Power Reduce the Terror of the Box O Ce?
Uncertainty in the Movie Industry: Does Star Power Reduce the Terror of the Box O±ce?¤ Arthur De Vany Department of Economics Institute for Mathematical Behavioral Sciences University of California Irvine, CA 92697 USA W. David Walls School of Economics and Finance The University of Hong Kong Pokfulam Road Hong Kong Abstract Everyone knows that the movie business is risky. But how risky is it? Do strategies exist that reduce risk? We investigate these ques- tions using a sample of over 2000 motion pictures. We discover that the movies are very risky indeed. Box-o±ce revenue dynamics are a Le'vy stable process and are asymptotically Pareto-distributed with in¯nite variance. The mean is dominated by rare blockbuster movies that are located in the far right tail. There is no typical movie be- cause box o±ce revenue outcomes do not converge to an average, they diverge over all scales. Movies with stars in them have higher revenue ¤This paper was presented at the annual meeting of the American Economic Associa- tion, New York, January 1999. Walls received support from the Committee on Research and Conference Grants of the University of Hong Kong. De Vany received support from the Private Enterprise Research Center of Texas A&M University. 1 expectations, but in¯nite variance. Only 19 stars have a positive cor- relation with the probability that a movie will be a hit. No star is \bankable" if bankers want sure things; they all carry signi¯cant risk. The highest grossing movies enjoy long runs and their total revenue is only weakly associated with their opening revenue.