The Halo Effect - Deepstash
The Halo Effect

The Halo Effect

Phil Rosenzweig

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Business Delusions

Business Delusions

Our thinking about business is shaped by a number of delusions - ones that distort our understanding of company performance, that make it difficult to know why one company succeeds and another fails.

These errors of thinking pervade much that we read about business, whether in leading magazines or scholarly journals or management bestsellers. They cloud our ability to think clearly and critically about the nature of success in business.

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The Halo Effect

This is our tendency to make inferences about specific traits on the basis of a general impression.

In the business world, it refers to the tendency to look at a company’s overall performance and make attributions about its culture, leadership, values, and more. In fact, many things we commonly claim drive company performance are simply attributions based on prior performance.

For example, if a company is profitable, people conclude that the leadership and processes must be competent.

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The Delusion of Correlation and Causality

Just because two sets of things are correlated does not mean that one causes the other to happen. Sometimes one might cause the other to happen. But we won't know which of them is the trigger. Maybe, another separate thing might be influencing both of them to happen. It is also possible that there is no relationship at all.

Does employee satisfaction lead to high performance? The evidence suggests it’s mainly the other way around—company success has a stronger impact on employee satisfaction.

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The Delusion of Single Explanations

Success cannot be usually attributed to one factor.

Many studies show that a particular factor—strong company culture or customer focus or great leadership—leads to improved performance. 

But since many of these factors are highly correlated, the effect of each one is usually less than suggested. 

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The Delusion of Connecting the Winning Dots

If we pick a number of successful companies and search for what they have in common, we’ll never isolate the reasons for their success, because we have no way of comparing them with less successful companies.

By looking only at companies that perform well, we can never hope to show what makes them different from companies that perform less well.

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The Delusion of Rigorous Research

If your data sources are corrupted by the halo effect, it doesn't matter how much data you have gathered, or how sophisticated your methodology was.

Data quality and quantity are equally important when it comes to research. If one takes a wrong assumption and backs it up with some numbers, the conclusion cannot be taken seriously. 

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The Delusion of Lasting Success

Almost all high-performing companies regress over time. The promise of a blueprint for lasting success is attractive but not realistic.

Success is transitory, and many companies that have outperformed in the past, won't do so in the future. A company cannot be successful forever on the basis of a few traits. Many external and internal factors affect a company and the company has to continually work towards achieving short-term and long-term success. 

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The Delusion of Absolute Performance

Company performance is relative, not absolute. A company can improve and fall further behind its rivals at the same time.

A company’s performance should be measured relative to other similar companies’ performance as it is a competitive environment. Measuring the company in isolation in absolute terms is not of much use.

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The Delusion of the Wrong End of the Stick

It may be true that successful companies often pursued a highly focused strategy, but that doesn’t mean highly focused strategies often lead to success.

Some companies have a focused strategy and some change their strategy based on competition, market, and internal factors. Some are successful and some are not due to internal and external factors..But this is not dependent on the type of strategy alone. 

For example, Intel decided to move to processors from memory chips and was successful. The Intel leadership was praised for this visionary move. But if the processors had not been successful, the leadership would have been criticized.

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Delusion of Organisational Physics

The study of corporate performance is not a science like physics. We wrongly believe that there are certain rules or a formula for success and if a company follows the rules or the steps of the formula, it will see all its goals being achieved. But in the real world, success is not because of a few controllable factors. There are many variables that determine the success or failure of the organization.

Performance doesn’t obey immutable laws of nature and can’t be predicted with the accuracy of science—despite our desire for certainty and order.

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