Wednesday, February 27, 2008

Self-Fulfilling in Hollywood

My former colleague at the London Business School, Olav Sorenson (now at the University of Toronto), together with his colleague David Waguespack, examined distributors in the US film industry. Distributors have certain pre-conceived ideas about what films will be a success at the box office – for instance, the number of stars in the film, the actors’ prior successes, previous experience of the production team, etc.

When Sorenson and Waguespack analysed data on over 5000 movies, they discovered that these distributors seemed correct in their beliefs; films that corresponded to their prior beliefs indeed reaped more revenues at the box office.

Yet, then Sorenson and Waguespack did a clever thing; they also analysed the scarce resources that these distributors assigned to their films, such as budget, promotion efforts, number of screens on opening day, favourable timing in the year (e.g. around Christmas many more people go to the cinema). What they found was striking: The reason why those films that the executives had high hopes for beforehand indeed did become successes could 100 percent be explained by the fact that the distributors in their subsequent allocation of resources very significantly favoured them.

When Sorenson and Waguespack, in their statistical analysis, corrected for the fact that distributors assigned so much of their scarce resources to those films, it turned out that the executives' assessments were completely wrong; those films usually did comparatively worse at the box office! The only reason why the films that they beforehand had thought would become successes indeed did reap "profits" is because they assigned more resources to them. Yet, they would have been better off assigning the scarce resources to the other movies. The executives' prior beliefs were false; they just seemed correct afterwards due to their own, self-confirming actions.

via Freek Vermeulen's blog -an Associate Professor of Strategic & International Management at the London Business School.

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