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Mean Reversion in Investment Decisions: The Case of Hollywood *
Author(s) -
Lampe Ryan,
Pancs Romans
Publication year - 2020
Publication title -
the journal of industrial economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.93
H-Index - 77
eISSN - 1467-6451
pISSN - 0022-1821
DOI - 10.1111/joie.12218
Subject(s) - novelty , hollywood , quality (philosophy) , economics , depreciation (economics) , adventure , franchise , investment (military) , selection (genetic algorithm) , action (physics) , mean reversion , econometrics , microeconomics , positive economics , history , psychology , computer science , marketing , business , law , epistemology , political science , social psychology , philosophy , artificial intelligence , art history , capital formation , profit (economics) , quantum mechanics , financial capital , physics , politics
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.