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"Rocket Science" comes to baseball and the movies

April 17, 2005 09:39 AM

Baseball.tiff

Remember when so-called "Rocket Science" came to Wall Street? What that meant, then and now, is the use of modern statistical analysis of the performance of stocks along with the use of modern portfolio theory to find and exploit arbitrage opportunities. This meant that a stock could be priced or valued by the prices of other stocks that could replicate its performance characteristics (mean and standard deviation).

The quite wonderful book Moneyball by Michael Lewis brings this kind of analysis to baseball, showing how the Okland As could put championship teams on the field of dreams with a payroll that was a fraction of the payrolls of teams they regularly beat. How could they do this? By looking at the historical performance of players, not their appearance and by disregarding the personal perceptions of baseball scouts of the player's potential. The As drafted and signed players whose on-base percentages (hitting and walks) were high, even if their "underpants were too large" and they didn't look the way scouts thought a baseball player should look. They would rather sign the "God of the walks" than a player who was physically more gifted, but undisciplined at the plate. It was the performance, based on sound statistical evidence, that ruled, not perceptions and imagining what a player might become.

The similarity of Moneyball to my Hollywood Economics is almost eery. Of course, my book is all about the performance of actors, directors, and movies, not the personalities of studio heads and marketing directors. And, I hasten to add that historical performance is far less reliable than in baseball because a movie is a one-off, novel product that involves many elements and performances, not just who the leading star is or how she/he performs in the role.

Where the two books come out the same way is in showing how the "insider" point of view is wrong. And these false beliefs create opportunities for arbitrage. The As exploited these opportunities and fielded great teams for little money. The arbitrage possibilities are there in the movies too, particularly in the ratings category; Hollywood has consistently over-produced R-rated movies and under-produced G-rated movies. (There is some recent movement on this arbitrage front. Finally.)

The cherished beliefs of baseball scouts and studio personnel are wrong. In both cases, they are anchored on story-telling about what this player or movie might become (another Willie Mays or another Forrest Gump), rather than the reality in the outside world. The reality as expressed in the statistics is that most movies will perform poorly, that a few will earn nearly all the returns, and that the historical average of movies of similar "type" is unstable and fails to predict performance. In short, "nobody knows anything" because the statistics are wild, with a non-stationary average and an infinite variance.

Hollywood thinks it is doing "Rocket Science" by using simple statistical models to try to predict movie revenues, but these models fail to match reality, are never tested, and place too much weight on stars and marketing. They engender a false security and confidence in "formulas" for good movies. Paradoxically, Hollywood would make better movies if it did not try to make them according to their formula. If you make a really good movie, people will find it. As in baseball, if you play a good game, they will come.

· The Movie Business

Comments

Posted by: Flower Online [TypeKey Profile Page] at September 12, 2006 7:42 AM

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