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Mean Reversion in Investment Decisions: The Case of Hollywood

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  • Ryan Lampe
  • Romans Pancs

Abstract

One explanation for the comparatively lower quality of movie sequels is selection bias, known in personnel economics as the Peter principle. 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.

Suggested Citation

  • Ryan Lampe & Romans Pancs, 2020. "Mean Reversion in Investment Decisions: The Case of Hollywood," Journal of Industrial Economics, Wiley Blackwell, vol. 68(1), pages 156-190, March.
    • Handle: RePEc:bla:jindec:v:68:y:2020:i:1:p:156-190
    DOI: 10.1111/joie.12218
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    References listed on IDEAS

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    1. Hall, Robert E, 1978. "Stochastic Implications of the Life Cycle-Permanent Income Hypothesis: Theory and Evidence," Journal of Political Economy, University of Chicago Press, vol. 86(6), pages 971-987, December.
    2. Edward P. Lazear, 2004. "The Peter Principle: A Theory of Decline," Journal of Political Economy, University of Chicago Press, vol. 112(S1), pages 141-163, February.
    3. Poterba, James M. & Summers, Lawrence H., 1988. "Mean reversion in stock prices : Evidence and Implications," Journal of Financial Economics, Elsevier, vol. 22(1), pages 27-59, October.
    4. Ken Hendricks & Alan Sorensen, 2009. "Information and the Skewness of Music Sales," Journal of Political Economy, University of Chicago Press, vol. 117(2), pages 324-369, April.
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    Cited by:

    1. Jordi McKenzie, 2023. "The economics of movies (revisited): A survey of recent literature," Journal of Economic Surveys, Wiley Blackwell, vol. 37(2), pages 480-525, April.
    2. Kuehn, Joseph & Lampe, Ryan, 2023. "Competition and product composition: Evidence from hollywood," International Journal of Industrial Organization, Elsevier, vol. 91(C).
    3. Alexander Cuntz & Alessio Muscarnera & Prince C. Oguguo & Matthias Sahli, 2023. "IP assets and film finance - a primer on standard practices in the U.S," WIPO Economic Research Working Papers 74, World Intellectual Property Organization - Economics and Statistics Division.

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