Book notes: The Halo Effect

Illustration from the book cover, Simon & Schuster

If you have spent any time at all in the world of business, you will have come across different books that claim to have insight into how you can run your business better, be a better manager, and be more successful.

We’ve all read a lot of these books, and many of them suffer from different problems.  Often when I finish a book I can’t help but wonder things like:

  • “I just read that whole book, but it should have been a blog post… which could have been summarized in a paragraph” – sometimes a core idea gets expanded beyond its capacity, just to fill pages and justify the sale of a book.  Reading 250 pages for something that should have been 20 can be irritating.
  • “Did the authors run a study just to write a book? What were their motivations for their research?” – having quality data underpin any claim is a good thing, but the sources and motivations behind any studies and their accompanying data should be considered.
  • “Those conclusions sure felt forced… as if there was a point that the author wanted to make, and they were cherry-picking supporting information to get there” – sometimes it feels like the authors did a lot of jumping to conclusions, and you don’t come away with a lot of confidence that what you read is as applicable as the authors want you to think.

When I read The Halo Effect… and the Eight Other Delusions that Deceive Managers, it helped me put a finger on some of the uncertainty I felt when reading many popular business books and provided a framework to think more critically about the advice I hear or read.

What is The Halo Effect?

The main thesis of The Halo Effect is laid out by Phil Rozenweig in the first chapter, which I would summarize as follows:

Many books try to answer “the mother of all business questions”: What leads to high performance? Unfortunately, answering that question is difficult if not impossible. Correlation vs. causation is rarely considered when books try to answer the question, and there are so many factors that go into the success (or failure) of companies.

There is little or no scientific rigor applied in the analysis given by most business books, meaning that what is presented as unassailable fact is often nothing more than speculative consideration of a few surface-level factors. Blindly repeating what supposedly brought success to other companies can be problematic; not only is it unlikely that the source of the success is well-understood, but the circumstances of those companies are probably different enough from yours that you wouldn’t be able to replicate their success using the same approach anyway.

We get an entertaining view into the idea that nobody really knows why companies are successful in chapter two, where the author walks us through several years of the company Cisco Systems. As we get to the late ’90s, various quotations from different pundits are given:

In 1997:

  • Nobody has this much fun going to work, and all they [Cisco employees] do is smile, smile, smile.” – Wired
  • “Thanks to Chambers’ seemingly flawless management, slick salesmanship, and a scorching series of acquisitions…Cisco has gone from relative obscurity to computer industry superstardom.” – Business Week
  • “Think of Cisco as an acquisition engine, as cleverly designed and highly tuned as the giant routers it builds to handle vast surges of Internet traffic.” – Fortune

Cisco was indisputably successful; their culture, their willingness to look outside the company for expertise (largely via acquisitions) was commonly attributed as sources of their success.

In 2000:

  • “Is John Chambers the world’s best CEO? Is it too late to buy his stock?” – Fortune
  • “Cisco, with CEO John Chambers at the helm, must be considered one of America’s truly outstanding companies, in the same league as Intel, Wal-Mart, and yes, GE.” – Fortune

We all know what happened next as the dot-com bubble burst. Cisco’s stock price went from $80 to $14, which brought all kinds of different challenges along with it. Suddenly the commentary was completely different.

In 2001

  • “On the way up to a stock market value of half a trillion dollars, everything about Cisco seemed perfect. It had a perfect CEO…It was the leader of the new economy, selling gear to new-world telecom companies that would use it to supplant old-world carriers and make their old-world suppliers irrelevant. Over the past year, every one of those characterizations has proved to be false.” – Fortune
  • “Oops! The surprising abruptness and severity of Cisco’s downturn — marked by a shocking $2.2 billion write-off of inventory in April — showed that it was just as vulnerable as any other company to an economic slowdown.” – Business Week

Of course, Cisco largely recovered – and the narrative shifted again. The company was described in a positive light, with many trying to determine what made them successful and (bottle it up to sell!)

The chapter is fascinating because it shows first-hand that we don’t know why a company is successful. If we did we would know for certain that its success would be continued, and anybody could replicate the success. Instead, news organizations talk about a company in absolutely glowing terms at one moment, just to do a complete about-face less than a year later.

The title of the book describes the idea that a successful company has a “halo” about them, which tends to affect how we perceive the causes of its performance. In a way, it amounts to: “Company X is successful; therefore the things they are doing, especially the things they are doing differently, must be what is making them successful”.

Throughout the book the author makes the case that we should look away from the halo effect and instead think critically: is a given company successful because consumer demand shifted and their offering suddenly became attractive to a larger base of people? Or is the company successful because they have a phenomenal CEO who anticipated the shift in demand, and built a company with a culture that could deliver on that demand when the time came? The main idea of this book is that we just can’t know because so many factors are all tied up with each other.

The 8 delusions

In addition to the halo effect, the author lists 8 additional delusions that are worth being aware of, all closely related:

1. The Delusion of Correlation and Causality

This is one of the more popularly-known delusions even outside this book. Did A cause B? Did B cause A? Were both caused by C? Or is it just chance that they even appear to be correlated?

When trying to understand correlation vs. causation for more complex topics such as sales success at a large company, it’s just not realistic to think that you can fully understand the relationships between different factors. It’s worth the effort to try and understand it as best we can, but thinking we can fully grasp causation vs. correlation is where the delusion steps in.

2. The Delusion of Single Explanations

People are complex, and groups of people are even more complex. The idea that the success of a multi-billion dollar company with tens of thousands of employees can be explained by a single factor, or even a few factors, is ridiculous – but many different business books imply just that. The promise of simple, fast, easy results makes these kinds of implied promises attractive, but they just aren’t realistic.

There’s usually nothing wrong with trying to improve by applying these suggestions, but always be aware of how many other factors went into the success of that company – most of which won’t apply to you.

3. The Delusion of Connecting the Winning Dots

“I researched these 4 successful companies, and they all did X, Y, and Z. Do those things, and your company can be successful too!”

This delusion takes the concept of correlation vs. causation and adds survivorship bias into the mix. There might be hundreds of other companies that did X, Y, and Z, but failed. Or, there may be a company that was on the verge of breakthrough success even though they vigorously rejected X, Y, and Z – but some act of god killed the company.

Just as we look at the clouds and see animals in what is just randomized water vapor floating through the atmosphere, it can be tempting to connect dots to create paths to success – whether there is something there, or not.

4. The Delusion of Rigorous Research

This delusion is similar to the appeal to authority logical fallacy. In other words: “We did a whole bunch of research, so this conclusion must be correct”. Or – “I did a whole bunch of research, so I am now an expert – come listen to what I have to say about it”.

In a controlled, laboratory setting where experiments are carried out under rigorous controls, research can sometimes be considered to prove something. When analyzing companies for things that make them successful, or when conducting “research” into the topic, it can be tempting to think that the process is complete and thorough. Considering how difficult it can be to conduct good research even under tightly controlled settings, the idea that any research can give conclusive answers in the world of business is, well, a delusion.

Realizing that most of what is passed off as research is neither complete nor thorough, you might start to wonder how much is even worth listening to – or you might at least listen with a more critical ear.

5. The Delusion of Lasting Success

What would you guess were the largest companies in 1967?

Go take a look here, and the answers probably won’t surprise you. It is interesting to think about how much has changed since then though – 2 of the ten biggest companies were photographic film companies, several of the members of the top ten list have since gone bankrupt, and unless you count the different oil companies that have merged over time nobody on the list from that time is still in the top ten. Some of the companies still have an impressive market cap (IBM and GM are both about half the size now in inflation-adjusted terms), but the biggest companies just keep getting bigger.

If nothing else, that chart shows us how much the definition of success changes over time, along with what is needed to achieve it. Who knew that film, such a mainstay in 1967, would be completely irrelevant in 2021? Even considering a successful transition to digital photography, could film companies have adapted in a way that that would have kept them in the top ten list?

The world is constantly evolving, and just because a company is successful now doesn’t mean that it will always be successful. Operating in a way that copies the supposed success factors of companies that were successful in the past does little or nothing to provide that same success going forward.

6. The Delusion of Absolute Performance

How well a company is doing is virtually always a discussion of “relative to who?”.

Say a company improves its revenue by 10%. Is that good? Well, it depends. If everybody else in the sector is experiencing 100% growth, then 10% isn’t that great. But, if everybody else saw a decline of 50% then an increase of 10% is fantastic.

Anytime you are considering the potential success of a company, make sure you have context around the success and that you understand the relative performance.

7. The Delusion of the Wrong End of the Stick

This delusion could also be called “is the dog wagging the tail, or is the tail wagging the dog?”

Just like correlation and causality can be hard to tease apart, different causalities can be hard to separate from each other. You can look at any number of things that a company is doing and try and understand how they contribute to the success (or failure) of a company, but it’s often difficult to know which ones have an impact.

8. The Delusion of Organizational Physics

You may remember from a physics class that gravity causes the acceleration of objects at a rate of 9.8 meters per second, squared.

Of course, this number completely discounts all factors such as wind resistance, varying gravitational pull at different points on the earth, etc – so the acceleration will never be precisely 9.8 m/s2. Physicists love their hypothetical worlds free of friction and other realities, where they can perform their thought experiments and invent story problems for midterms.

Many studies and books approach success factors in a vacuum. They ignore all the other factors that are co-mingled with what makes a company successful and imply that something a company did is what brought them that success. The delusion is in thinking that there is a formula that one can follow, and be rewarded with exactly the results that we expect.

Summary

Anybody interested in better understanding the success factors behind different companies will find this book helpful. The book doesn’t have all the answers about how to make your business more successful, but it does help you pause and reflect next time you hear somebody making that claim.

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