Friday, February 26, 2010

The Halo Effect (a book review)

Phil Rosenzweig, The Halo Effect …and the Eight Other Business Delusions that Deceive Managers (New York, Simon & Schuster, 2007), 233 pages
This book provides a lot to ponder. Rosenzweig attempts the expose fallacies commonly seen in most business books, particularly the “Halo effect.” The halo effect refers to attributing positive traits based on another trait that may or may not have anything to do with the one another. Over and over again, Rosenweig shows how popular authors in their search for clues on success, look at performance and then inferred other positive traits. If a company is profitable (or if it’s stock value is rising), Rosenzweig discovered those attempting to explain the company’s performance will infer a number of positive attributes that may or may not be true. To illustrate his theory, Rosenzweig explores a number of companies (Cisco, Lego, ABB, etc) that grew fast and were praised for their positive attributes and then, after the company peaked and its value declined, showed how the same attributes were often blamed for their failure. While the companies were seen as profitable, they were also seen to have a number of good traits such as being seen as a good place to work, listening to their customers, having top-notch leadership and expanding their base. When declining, they are seen as not being a good place to work, not listening to their customers, having poor leadership and losing their focus. In many cases, Rosenzweig points out, nothing had changed but the companies’ stock value (and this shift had more to do with the marketplace than with how the company was managed).

Many of the other delusions (or fallacies) also involve an aspect of the halo effect. The other eight (followed by the page number where he begins to discuss each) are:

1. The Delusion of Correlation and Causality (72)
2. The Delusion of Single Explanations (75)
3. The Delusion of Connecting the Winning Dots (92)
4. The Delusion of Rigorous Research (100)
5. The Delusion of Lasting Success (101)
6. The Delusion of Absolute Performance (111)
7. The Delusion of the Wrong End of the Stick (121)
8. The Delusion of Organizational Physics (124)

Rosenzweig is critical of the plethora of business books that promise to show the successful habits of business leaders, but in doing so are clouded by the Halo Effect. Going back to Peters and Waterman’s
In Search of Excellence, which came out in the early 80s and gave rise to this new genre to more recent books, such as those by Jim Collins (Built to Last and Good to Great), Rosenzweig notes that most of the companies highlighted in these books have not continued having the success they once enjoyed. This shouldn’t be surprising, according to an understanding of economic theory of markets. Those who are on the top face more difficulty maintaining their position because everyone else is taking what they do and finding new and better ways to do it. So it’s “predictable and normal” for companies to lose their luster after periods of good performance. This can be shown in a survey of the S&P 500. In the fifty years prior to this book (1957 to 2007), 426 of the 500 companies have changed! Furthermore, performance is relative to the market. One can be doing very good things (which should lead to a strong performance), yet be killed in the marketplace because other companies are better. Examples would include General Motors (whose products today are far superior to their product in the 70s, yet their competition has also improved) and K-mart (who has improved, but still has fallen behind Walmart and Target. See pages 111-115).

Although critical of findings in many business books like
In Search of Excellence and Good to Great, Rosenzweig does have some praise for them. He credit’s the authors for being good at telling a story and suggest that there is a lot we can learn from such books. Stories help us to make sense of our world and illustrate value insights (136-137). However, we can’t just take the “truths” shown in the stories about one organization and apply it to another and expect the same or similar results. The market is too complex for such simplistic thinking.

Success, according to Rosenweig, is achieved by two things: strategy and execution. Strategy helps set one apart from rivals and execution refers to how the strategy is carried out (144). Yet, success is not eternal. Once finds a successful formula, others will copy. “Success is not random,” Rosenzweig notes, “but it is fleeting.” (103)

Although this book doesn’t discuss investment or historical theory, Rosenzweig’s thesis has something to say to each discipline. His data supports the idea that one needs to regularly rebalance a portfolio in order to “capture” profits. If a company is soaring, sooner or later its value will decline. One can never “time” the market (Rosenweig notes that markets don’t respond to research!), so taking the contrarian position and selling while everyone else is buying is the way to add value to a portfolio. Also, looking at the life cycle of companies and how fleeting success is a reminder of the need for diversification (see page 122). As for the study of history, Rosenzweig’s findings challenge the “great man” theory of history (he’s not the first to debunk this theory). He points out how leadership is often credited for success, but in the overall scheme of things, leadership has been shown to add only a small increase to a company’s success (a 4 to 10% gain, see pages 133-134). If you want to be seen as a good leader, it’s far more important to be at the right place at that right time than it is to have good leadership skills! It’s not that leadership skills are not important, they are! But other factors are more important.

Rosenzweig may not be as easy to read as other business books. Although he tells a good story, his thesis depends on drawing from a variety of studies which tends to break the flow of the stories he tells. But this isn’t a story book; the book has valuable insights and raises many questions for one to ponder about the stories one hears. I recommend this book to anyone interested in business and leadership. Rosenzweig is a professor at IMD in Lausane, Switzerland and earned his Ph.D. from the Wharton School of Business at the University of Pennsylvania.


  1. This book also sounds like the perfect cure for insomnia.

  2. To succeed you have to have a game plan, but it's also true that performance/success is relative to the market. Sounds like an interesting book.

  3. I enjoy discussions of logical fallacies, and, alas, I'm confronted with those who succumb to the "halo effect" on a daily basis. As I'm sure the book points out, what winds up happening is that if success follows the application of a fallacy in a truly "blind hog/acorn" scenario, the fallacy becomes entrenched and its impossible the dislodge no matter how many failures come thereafter when its deployed. Stated differently, people keep doubling down on "stupid."


  4. Murf, when you finish "The Secret of Water"...

    Ily, we too often think we're in more control than we are

    Randall, 'doubling down on stupid' That's good! I think you'd enjoy the book.

  5. "One can be doing very good things (which should lead to a strong performance), yet be killed in the marketplace because other companies are better."

    What a great truth, Sage. Competition, dominant positions in the market can kill a company before it even starts. I bet this is an interesting book, even more in times of crisis.

  6. but can you not see the same when the sportsman that wins is on the News to speak on all sorts of issues. Or that Woods is expected becaues he is good at hitting a little white ball round the countryside to have an exceptional moral base. What makes him above the curve as distinct from a plumber. Enron is another, where it was not until people asked what, that it was realised nothing was the answer.

  7. Leni, competition is tough, but it also provides lower prices and should provide better products services (lately it seems only to do the first!)

    Vince, Amen! It is funny how we think that sports stars (or movie stars) knows so much...

  8. A varied subject among the many books you bring to life, Sage! :)

  9. Sounds like an interesting book, but since I do my best to distance myself from any form of finances whenever possible, I'll just say I've read it since I'm sure your review is quite extensive and comprehensive! As you are well aware, dealing 'with halo's is an occupational hazard ... the glow so often doesn't live up to the advertisement!?!