Mean Reversion in Investment Decisions: The Case of Hollywood

39 Pages Posted: 8 May 2018 Last revised: 14 Apr 2019

See all articles by Ryan Lampe

Ryan Lampe

California State University, East Bay - Department of Economics

Romans Pancs

ITAM, Centro de Investigación Económica

Date Written: April 11, 2019

Abstract

One explanation for the comparatively lower quality of movie sequels is selection bias, known in personnel economics as the Peter principle (Lazear, 2004). Only abnormally successful movies are selected for a sequel. Another explanation is a deterministic depreciation in quality due to the decline in the novelty of the sequel’s characters and storyline. Both explanations predict that, relative to the original, the sequel’s performance will revert towards the mean. We develop a structural model to decompose the two explanations, and estimate its parameters using detailed data on 306 franchise films and 2,823 non-franchise films between 1995 and 2014. Parameter estimates provide evidence of selection bias for action, adventure, and horror movies, and evidence of a deterministic decline in quality for comedies.

Keywords: Mean Reversion, Peter Principle, Movies, Sequels

JEL Classification: D22, D25, L82

Suggested Citation

Lampe, Ryan and Pancs, Romans, Mean Reversion in Investment Decisions: The Case of Hollywood (April 11, 2019). Available at SSRN: https://ssrn.com/abstract=3166335 or http://dx.doi.org/10.2139/ssrn.3166335

Ryan Lampe (Contact Author)

California State University, East Bay - Department of Economics ( email )

25800 Carlos Bee Blvd.
Hayward, CA 94542
United States

Romans Pancs

ITAM, Centro de Investigación Económica ( email )

Camino a Santa Teresa No. 930
Col. Héroes de Padierna
Ciudad de México
Mexico

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