I. Intro to longtail/long volatility theoryMBUS 3000 1st Edition Lecture 3Outline of Last Lecture I. Intro to longtail/long volatility theory II.Law of large numbers III. Longtail/long volatility strategy IV. RandomnessOutline of Current Lecture V. Jobs in music industry VI. Jacksonion randomness vsErtegunian RandomnessVII. there is no hit machine VIII. TalentCurrent LectureA) What are some jobs or careers in the music business industry and how do they get paid? 1) Tour manager- - They make travel arrangements and do accounting, their salaries vary from $1000 to $5000 a week and they get paid at the end of one or two weeks- It doesn’t matter how well the show sells or how well a band does, the tour manager gets the same amount of money- Limited profit potential 2) Song Writer-- If they write a song for a CD they get 9 cents per song/per CD- If the band has a great hit, you get paid a lot more as a song writer - Unlimited profit potential (these types of people do the best in the music industryMusic industry is turbulent, chaotic, irreducibly complex, randomnessB) Two kinds of randomness 1) Ertegunian Randomness-designed the modern day music industry These notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.- “Throw ten records against the wall and see what sticks “which basically means we don’tknow which song will be a hit - Unpredictable which artists is successful- 9 artists will lose money with their songs and then one will be a hit 2) Jacksonion randomness-created by Michael Jackson- Why was “Thriller” 40-80 million better than “off the wall?”- Unpredictable the size of the hit - Once a song is a hit, the size of the hit can vary - Two different hits one sells 5 million records and the other sells 50 million records C) There really isn’t a logical way to make a record- Hit machine- you use the exact same number in advertising, tour support, promo personhours, video and recording budget, and the same writers as you did with the last hit so logically you should get the same results but of course this doesn’t happen- this is called normal or Gaussian randomness- But in reality we get “wild” or non-Gaussian randomness - Because we have this kind of variation then the hit machine doesn’t exact D) Talent is overrated - Important to make a lot of bets - Potential upside from a hit is unlimited (you want to be the songwriter not the tour manager) - You cant come up with a useful average in the music industry because its wild variation - The best players in the music industry don’t use a formula - A lot of times bands get overpaid because there is no average E) wild vs. normal distribution: mandelbrot’s view 1) Normal-variation from average height adult males-its basically normal 2) Wild- Dow Jones daily price changes are wild-one number is very different from another one - Wild variations have no useful average, mean or median - No real rational way to play last weeks example dice game - However in face of wild variation “sellers” tend to sell songs and sound recordings too