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Does Hollywood Make Too Many R-Rated Movies? Risk, Stochastic Dominance, and the Illusion of Expectation

Author

Listed:
  • Arthur De Vany

    (University of California at Irvine)

  • W. David Walls

    (University of Calgary)

Abstract

We estimate the probability distributions of budgets, revenues, returns, and profits to G-, PG-, PG13-, and R-rated movies. The distributions are non-Gaussian and show a self-similar stable Paretian form with nonfinite variance and nonstationary mean. The profit distributions have asymmetric tails, which means that Hollywood could trim its "downside" risk while increasing its "upside" possibilities by shifting production dollars out of R-rated movies into G-, PG-, and PG13-rated movies. Stars who are willing to appear in edgy, counterculture R-rated movies for their prestige value may induce an "illusion of expectation" leading studios to "green-light" movies that have biased expectations.

Suggested Citation

  • Arthur De Vany & W. David Walls, 2002. "Does Hollywood Make Too Many R-Rated Movies? Risk, Stochastic Dominance, and the Illusion of Expectation," The Journal of Business, University of Chicago Press, vol. 75(3), pages 425-452, July.
    • Handle: RePEc:ucp:jnlbus:v:75:y:2002:i:3:p:425-452
    DOI: 10.1086/339890
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    JEL classification:

    • L82 - Industrial Organization - - Industry Studies: Services - - - Entertainment; Media
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • C60 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - General

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