Superman, Captain America and Market Showdowns

(Originally published here.)

The biggest fight of 2016 won’t be between Republican and Democrat presidential candidates but between the Avengers and the Justice League offerings from Walt Disney Co. and Warner Bros., respectively, which plan to release the comic-book-themed blockbusters two years from now on May 6.

Movie studios generally try to avoid conflicting release dates of films that appeal to the same or similar audiences. This coming weekend, for example, the major studios will debut an animated film for children, a horror film and an attempt to make the National Football League draft seem interesting.

Sometimes the studios don’t get it right. The classic example was when “The Perfect Storm” and “The Patriot” came out on the same weekend in 2000. Both films grossed hundreds of millions of dollars, though “The Patriot” probably lost money. As a rule of thumb, a movie has to gross at least twice its production budget to be profitable. The film’s worldwide gross of $215 million was slightly less than half its production budget of $110 million.

The studios made the same mistake on the third weekend of June 2008, when they released “The Love Guru” and “Get Smart,” two PG-13 comedies; “Get Smart” didn’t do well enough to justify a sequel, while “The Love Guru” was a flop. Total box office receipts for that weekend were lower than every other weekend from mid-May through early August.

Normally I wouldn’t have cared much about the box office receipts of either film, but at the time I was a summer intern at a hedge fund that wanted to teach a lesson about trading. It constructed two futures markets to let us bet a week in advance on each film’s opening weekend box-office gross. The value of our positions adjusted in real time; if prices moved too far from whatever you had bought or sold, you would be kicked out of the game. After the weekend numbers came out, anyone who still had open bets would get paid (or have to pay) the difference between the actual numbers and what they had wagered would happen.

There were lots of strategies available. Some people acted as market makers, posting bids and offers for both films without taking any fundamental view on what the “right” prices should be. Someone in a previous generation had supposedly created an Excel macro that would respond instantly to changes in posted bids and offers, catching anomalies and errors faster than any human.

Others turned to fundamental research in the hope that they could make a better forecast than their rivals. That’s a fool’s game for amateur stock pickers, but the odds are somewhat better if you’re up against 15 or so college kids who know as little as you do. Even the experts had little insight into how the two movies would do in the absence of historical precedent. I had “Norbit,” the poorly reviewed but financially successful Eddie Murphy comedy that grossed about $34 million on a weekend in February, was a reasonable benchmark. That turned out to be optimistic.

One of the central lessons was the importance of rumors and psychology. Someone sent a screenshot of a fake news story about one of the movies. That moved markets long enough for a few people to make money without having to take any risk. Groups of people with the same positions tried to manipulate the market with small trades at ridiculous prices in the hopes of blowing up those betting the other way.

It may be bad for the studios’ bottom lines, but pitting the Avengers’ Captain America against the Justice League’s Superman and Batman might be very educational for the rest of us.

(Matthew C. Klein is a writer for Bloomberg View. Follow him on Twitter at @M_C_Klein.)


About Matthew C. Klein

I write about the economy and financial markets for Bloomberg View. Before that I wrote for The Economist on a fellowship provided by the Marjorie Deane Financial Journalism Foundation. I have worked at the world's largest hedge fund and read every FOMC transcript since May, 1987.
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