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

Abstract:     
This paper estimates 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 non-finite variance and non-stationary mean. We stochastically rank these distributions to investigate film critic Michael Medved's argument that Hollywood overproduces R-rated movies. The evidence shows that the industry's critics and its shareholders can agree that Hollywood does make too many trashy movies. The profit distributions have aysmmetric 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 even PG13 movies. Stars who are willing to appear in edgy, counterculture R-rated movies for their prestige value may induce an "illusion of expectation" leading a studio to "greenlight" movies that have biased expectations.

Number of Pages in PDF File: 46

JEL Classification: L82

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