The Halo Effect


Go buy this book now. I am serious. Todd Sattersten sent me The Halo Effect, knowing I would love it, and I did. The book is fantastic.

First of all, author Phil Rosenzweig is one of only a handful of people to seriously critique Good to Great in a public forum. I did it here, and I have received lots of negative comments and emails about it. Phil's criticism digs in much deeper and more thoroughly than my post, and I found it refreshing to (finally) read something that validated what I knew to be true. I still can't understand why people are so obsessed with this Good to Great, but I suspect it's because "it's hard to free fools from chains they revere." (that's Voltaire)

Overall, The Halo Effect is about business delusions that deceive managers. Discussing all of them is beyond the scope of this post, so what I want to do is tell you why this is important stuff and why you should read this book.

First, let's turn to Rosenzweig's description of an important study by Professor Barry Staw that illustrates the Halo Effect well.

…conducted an experiment in which groups of participants were asked to estimate a company's future sales and earning per share based on a set of financial data. Afterward, he told some of the groups they had performed well, making accurate estimates of sales and earnings per share, and told other groups they had performed poorly – but Staw did so completely at random. In fact, the "high-performing groups" and "low performing groups" had done equally well… the only difference was what Staw told them about their performance. They he asked the particpants to rate how well their groups had done on a range of issues. The results? When told they had performed well, people described their groups as having been highly cohesive, with better communications, more openness to change, and superior motivation. When told they had performed poorly, the recalled a lack of cohesion, poor communication, and low motivation.

In other words, their judgement of their performance colored their memories of the way the group worked together. Sound crazy? It shouldn't. Dr. Elizabeth Loftus has repeatedly proven that memory is not reliable, and can be affected after the fact. (I wrote about her briefly in this post about the effects of advertising after the fact.)

In a nutshell, that is the main focus of this book – that our evidence of what works in business and what doesn't work is tinted by "halos," because we only look at the winners, and then we assume that what they have done is right. For instance, a CEO with a large ego at a successful company may be seen as confident and decisive. Five years later, when the company is doing poorly, the same CEO may be seen arrogant and intransigent. Rosenzweig gives plenty of examples where the business press is in love with a company, lavishing praises on executives only to turn around and slam those same people two years later. They almost act as if executives are in control of everything that happens, and that the business world does not have elements of luck or randomness.

Another key point Rosenzweig addresses it that business success is relative. You could have a great strategy. You could execute it well, you could create purple cows, you could have awesome customer service, you could do everything single thing you believe it takes to make you a successful company, but if your competition does it better, your performance won't look good compared to theirs. The Halo Effect illustrates this brilliantly with an analysis of K-mart during the 1990s. The company performed extremely well by any measure… except when you stacked it up against Wal-Mart. Business doesn't happen in isolation.

So why do we continue to look for business success stories, and to model our companies after them? According to Rosenzweig:

It's a far more appealing story than the one suggested by the facts: that success is largely transitory and that most companies that have done well in the past won't outperform the average in the future.

Telling managers what they want to hear and reconfirming their pre-existing beliefs will always sell more books than telling them business is hard and risky and a large part of company performance is out of their control. It's the same reason that "lose weight by eating less and exercising more" isn't a more popular title for diet books. We aren't looking for truth, we are looking for comfort.

Beware that The Halo Effect may open your eyes to a world of business that is not what you want it to be. If you want to take the blue pill, stick with the business best seller section. If you want to have your eyes opened that the red pill and read The Halo Effect.