Bicycle Industry

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 questions 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 because 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 Association,
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 correlation 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. Contrary to conventional wisdom in Hollywood, the top stars are female and a star is more important in extending a movie 's run than in making it open.
We conclude: (1) The studio model of risk management lacks a foundation in theory or evidence and revenue forecasts have zero precision.
In other words, \Anything can happen." (2) Movies are complex products and the cascade of

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