The Halo Effect!
“One of the most important management books of all time” – Nassim Nicholas Taleb
Every once in a while we come across something that have defined a particular discipline or inspired research into a field of study for a century. I wouldn’t go as far as saying that Halo Effect is the best book that I have read that deals with biases; Daniel Kanhemann (who we highly recommend) would feel insulted at that sentence and fairly so. What I would say is, The Halo Effect is surely among the list of 20 must read books that management professionals recommend others to read. And that is a mighty impressive list to be in. Being students of behaviour more than numbers, we felt the need to review and recommend The Halo Effect to our readers.
And since our weightage bears not even nearly similar weight to the latter, I’d just use his words:
“One of the most important management books of all time” – Nassim Nicholas Taleb
People go through success stories and try to pick a formula to explain the success story, but in reality, a formula doesn’t exist. One cannot replicate the success of other companies. In March 2000 Cisco briefly became the most valuable company in the world. The company was showered with praise by the press for its organisational excellence, discipline and coordination. Exactly one year later its share price had dropped from a high of $80 to a meagre $14. Business Week thus reported that Cisco had got out of control with a “Wild West culture”.
The company was described as being in chaos, lacking coordination and not listening to its customers. How could one organisation change so quickly? The answer, according to Phil Rosenzweig, is that it didn’t. What changed was the way the company was described and that was based solely on its stock price.
Rosenzweig’s potent argument is that it is very difficult to fully understand the dynamics of an organisation. We therefore base our judgments uniquely (mostly incomplete view) on financial results. If a company is making good profits the press will talk of a powerful, dynamic CEO and a strong corporate culture. If the same company is doing badly, the same CEO will be described as arrogant and out of touch. The firm’s corporate culture will be described as poor. He calls this The Halo Effect.
The eight other delusions that Rosenzweig talks about are:
The Delusion of Correlation and Causality: When two things are correlated, we can’t always say which caused the other. Is performance caused by employee satisfaction or is it the other way around? Read as ‘Post Hoc ergo Proctor Hoc’
The Delusion of Single Explanations: Company performance cannot be attributed to a single quality, such as strong leadership.
The Delusion of Connecting the Winning Dots: If we look for what successful companies have in common, shouldn’t we also compare them to less successful companies?
The Delusion of Rigorous Research: If the data isn’t of good quality, it doesn’t matter how much we have of it. This is the most important lesson we have acquired over our time as Professional Money Managers in the Industry.
The Delusion of Lasting Success: Almost all high-performing companies regress over time. I don’t have the exact number, but over 50% of companies in the S&P drop out in around 20 years currently. This number has been constantly going down over the last few years.
The Delusion of Absolute Performance: Performance is relative, not absolute. A company can improve and fall further behind competitors at the same time.
The Delusion of the Wrong End of the Stick: Following sound management principles may not necessarily lead to success.
The Delusion of Organisational Physics: Studying and predicting company performance is not a science.
We highly recommend this book to understand more about biases.
Until next time…