R-Rated Movies Less Successful
October 24, 2000
More than half of the movies released between 1985 and 1996 were rated R. Yet all but one of the 20 highest-grossing movies ever made have been rated G, PG or PG-13. One reason may be that R-rated films -- portrayed as attacks on conventional social and moral values -- attract a disproportionately large share of Hollywood's on-screen and behind-the-camera stars. But in addition, Hollywood executives are using a faulty decision model for evaluating movies as economic prospects.
All movies have uncertain prospects for financial success, and before one is released, a Hollywood executive can only know the probability of outcomes. Since each movie is unique, even these probabilities may be difficult to ascertain. They are what economists call random variables. To make informed decisions, the studio must get the statistical model of these random variables right. This calls for a statistical model that compares whole probability distributions rather than averages or expectations.
During the period studied, G, PG and PG-13 movies had a higher yearly success rate than R-rated movies when success is measured on the basis of box-office revenues and returns on production costs.
- Only an average 6 percent of R-rated movies earned cumulative box-office revenues in excess of $50 million, compared to 13 percent of G- and PG-rated movies and 10 percent of PG-13 movies.
- An average 20 percent of G-rated films, 16 percent of PG-rated films and 12 percent of PG-13-rated films had box-office revenues in excess of three times the production budget, compared to 11 percent of R-rated films.
The number of R-rated successes is high because more of these movies are made (and that may blind decision makers who do not pay attention to the odds), but the success rate of R of R-rated movies is much less than the success rates of G, PG and PG-13 movies. An executive seeking to trim the downside risk and increase the upside possibilities in a studio's film portfolio could do so by shifting production dollars out of R-rated movies into G, PG and PG-13 movies.
Source: Arthur De Vany and W. David Walls, "Does Hollywood Make Too Many R-rated Movies? Risk, Stochastic Dominance and the Illusion of Expectation," forthcoming, Journal of Business.
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