The Halo Effect and the Myth of Best Practices

There’s a joke that if you read just two books, What They Don’t Teach You At Harvard Business School and What They Teach You at Harvard Business School you must, by definition, have read the sum total of all human knowledge.

Hardly the best gag, but hidden beneath is the implication that no business management book can provide you with anything other than a modicum of true wisdom. In fact, one can, without much effort be more sceptical – any business book claiming to be able to define “what makes a successful company or great CEO?” are so prone to both general survivorship bias and the specific heuristics of its author, that a different writer could theoretically argue the opposite view. Depending on the author’s viewpoint, evidence is often filtered to the point that what looks superficially convincing may be little more than pseudoscience.

Phil Rosenzweig exposed such faults in his brilliant 2007 book The Halo Effect. The halo effect, closely related to confirmation bias, is the cognitive bias whereby one unconsciously assumes that, in business for example, a measure of success (such as share price performance or profits) must directly reflect its good strategy or top quality management. There is little room for luck or subtle shades of grey – and if an overall impression of a company is favourable then thoughts about all aspects of its make-up are likely to be seen as consistently positive.

Anand Sanwal took up this theme when he highlighted in The Myth of Best Practices that the corporate world is infected with what he described as best practicism. “Best practicism generally surfaces when people and organizations errantly believe that management and organisational performance are a science. The truth, however, is that there is no formula that guarantees corporate leadership or the ability to outperform the competition.”

The halo effect equally applies to individuals, corporate brands and even music – we often attribute positives to people or companies in areas other than their area of personal or product expertise, or assume they are consistently good. Diehard fans of The Beatles will tell you that they never made a bad record, for example, but to listen to Revolution #9 on the White Album is the best way on the planet to waste of 8 minutes and 22 seconds of your life. But even I, as a Beatles aficionado, wish the White Album had been a single rather than a double, but I digress.

The physical attractiveness of an individual is one characteristic that typically produces a halo effect, whereby we attribute other positive attributes, often character-related, like honesty, reliability and other qualities. We tend to make unconscious positive links and connections, about people’s characters based on a single trait, just as we do for unrelated events. “We are association machines,” says psychologist Gary Klein, and this is something used and exploited in marketing worldwide.

Indeed, don’t think it is just the fashion industry and beautiful models that take advantage of the evolutionary psychology behind the halo effect – many types of marketing are based on the halo effect, through brand, celebrity endorsement or other types of association. And more broadly, there is plenty of evidence showing that attractive people have a natural advantage whether they be a pop star, politician or a prisoner in the dock awaiting sentence.

So how can we avoid falling for this cognitive bias? In a nutshell, we need to examine the evidence objectively and independently and try and avoid confirmatory bias. The business model that works well for some companies is not necessarily the correct one for your business, nor indeed for the future. As my friend and mentor, the brilliant Professor Costas Markides of the London Business School tells his senior executives “Stop thinking out of the box because there is no box. Just ask yourself three simple questions: Who is customer? What is the benefit to the customer? How should I sell it?” Only then can you decide on the right strategy for your company, whether it be disruptive strategic innovation (Enterprise became the number 1 car rental company in the US by choosing not to compete in the same space as Avis and Hertz); or by selling emotional as well as product benefits (“Louis Vuitton doesn’t sell handbags – it sells dreams.”)

And don’t assume today’s winners will even be playing the game in a few years time. This struck home with me when I saw a recent article from The Washington Post highlighting annual data from www.comscore.com about the most visited websites since 1996. Back in the 1990s, the top 20 companies included Excite.com, Infoseek.com, Tripod.com and Xoom.com. In 2001 Google made it into the top 20, and has been in the top 5 since 2002. (Last year the top 5 were, in order, Yahoo, Google, Facebook, Microsoft and AOL).

Things change but the halo effect will remain as long as we are human. People will keep buying the latest business management book assuming it will contain a scientific formula to success. There’s undoubtedly a lot of wisdom in books, but as someone who believes that improving people’s self-awareness and self-discipline are two keys to success in most things, I believe that the best way to close the gap between potential and performance is unlikely to be found in this year’s business best-seller which will be stuffed full of examples of the halo effect. The best way, in my opinion, to go from good to great is through personal coaching – but that’s another story for another day. But for now, can you imagine any sportsman or sportswoman at the top of their game not having a coach? Why should business or investment be different?

My favourite ‘business’ books? At the risk of displaying my own halo effect, I’ll stick, for now, to Marcus Aurelius’ Meditations, a first century Stoic classic that has stood the test of time; Charles Ellis’ Winning the Loser’s Game (the original short paper was published in 1975); and the pure wisdom and experience that flows through Munger’s Poor Charlie’s Almanack (2005). I have plenty of other psychology and investment book recommendations, should you be interested, elsewhere on the site.

Finally, one of the favourite tweets that I came across in 2014 read as follows: Guy next to me on flight brought ‘7 Habits of Effective People.’ He never opened it and spent all flight playing Candy Crush and sleeping.

 

A shorter version of this was written for the Pinkers Post’s website in The Port for Thought.