Duncan Watts (of Columbia’s sociology department) wrote an article in the New York Times the other day:

As anyone who follows the business of culture is aware, the profits of cultural industries depend disproportionately on the occasional outsize success — a blockbuster movie, a best-selling book or a superstar artist — to offset the many investments that fail dismally. What may be less clear to casual observers is why professional editors, studio executives and talent managers, many of whom have a lifetime of experience in their businesses, are so bad at predicting which of their many potential projects will make it big. How could it be that industry executives rejected, passed over or even disparaged smash hits like “Star Wars,” “Harry Potter” and the Beatles, even as many of their most confident bets turned out to be flops? It may be true, in other words, that “nobody knows anything,” as the screenwriter William Goldman once said about Hollywood. But why?

Duncan continues:

Recent research, however, suggests that reliable hit prediction is impossible no matter how much you know — a result that has implications not only for our understanding of best-seller lists but for business and politics as well.

Conventional marketing wisdom holds that predicting success in cultural markets is mostly a matter of anticipating the preferences of the millions of individual people who participate in them. From this common-sense observation, it follows that if the experts could only figure out what it was about, say, the music, songwriting and packaging of Norah Jones that appealed to so many fans, they ought to be able to replicate it at will. And indeed that’s pretty much what they try to do. That they fail so frequently implies either that they aren’t studying their own successes carefully enough or that they are not paying sufficiently close attention to the changing preferences of their audience.

The common-sense view, however, makes a big assumption: that when people make decisions about what they like, they do so independently of one another. But people almost never make decisions independently . . .

Similar (but not identical) to the querty and Betamax effects

Duncan goes on to describe his research with Matt Salganik and Peter Dodds on “path dependence”–experimental results that indicate that people pick things partly because they’ve been recommended by others, and thus some initial randomness can propagate into large, inherently unpredictable outcomes. Sort of like the querty or Betamax effect, but with the path dependence coming from preferences rather than from the costs of changing.

But what about economics?

The above is all interesting, but one thing that seems to be missing is the idea of economic equilibrium (or near-equilibrium). I’m somehat puzzled by the omnipresent “Nobody knows anything” quote, because these TV and movie producers know a lot. For example, cop shows are (usually) popular, so they have lots of versions of Law and Order on the air. Nobody knows anything for certain, but, probabilistically, the experts seem to know a lot. But other people know a lot too, hence the producers of Law and Order charge a lot of money for their show, so “nobody knows anything” about whether the new installment will make money for the TV network. At least that’s how it would go in economic equilibrium. Thus, although “nobody knows anything” sounds mysterious, it would really seem to me just a natural extension of economic competition.

Duncan’s article is interesting–and he and his colleagues really do seem to have found something interesting with their experimental studies of path dependence–but I don’t think this effect, although true, is actually necessary to explain why “nobody knows anything.”

P.S.

In response to some comments from Duncan, let me clarify the above statements:

My point relates to the “nobody knows anything” quote.

If “knowing something” means knowing (with high probability) whether a movie (say) will sell lots of tickets, then I think the quote is false. I can be pretty confident that the next George Lucas movie will sell zillions of tickets, that the next John Sayles movie will sell less than zillions but more than thousands, and that if my brother-in-law decides to make a movie, it will almost certainly sell less than thousands of tickets.

But if “knowing something” means knowing (with high probability) whether a movie will make money–yeah, then the quote is probably correct. And it’s basically correct for economic reasons, I’d think: George Lucas charges a ton of money to distribute his movie, John Sayles charges a bit less, and my brother-in-law would have to pay a bit to the distributor. To first approx, the movie maker would charge the expected value of the sales, leaving uncertainty about whether the movie would make money.

This economic-equilibrium assumption is just an approximation, of course; it ignores negotiation, asymmetric information, etc. But it seems roughly correct, no? If cop shows are moneymakers (because they get good ratings and can be made with no-name actors and cheap sets), then producers will flood the market with them until, at equilibrium, they don’t make money anymore. They might still be popular but the next cop show might lose money.

Anyway, my point was that this could all be happening in the absence of any path dependence. So what I was writing in the blog entry is that: (1) path dependence is interesting and important (and so is the experiment done by Duncan, Peter, and Matt), but (2) I don’t see path dependence as necessary to explain the Goldman quote.