The Halo Effect

Author: Phil Rosenzweig

This book annoyed me. But then at the end I liked it. I’ll explain why a bit later.

The premise of the book is based around what the author calls The Halo Effect. The Halo Effect in the context of this book refers to how our judgement of companies is typically clouded by performance indicators like revenue growth or stock price, and we give credit to great leadership, or decision making based on those indicators.

The book is quite critical of a lot of business journalism, and spends a long time trashing Jim Collins Good To Great and Built To Last. He speaks so negatively of it because, despite the huge volumes of research Jim Collins put into his work, Rosenzweig says it is clouded with Halo’s and likens the book to more of an inspirational story that prods our attraction to rhetoric based on working hard, never giving up, and being rewarded for doing so.

He argues that we so often want to make Business a science, like physics. We boil it down to formula’s. Everyone wants to know how X leader was able to achieve such fantastic growth. What is their secret?

When we see a company doing really well, we compliment their leaders, their vision, say they executed strategy very well, aggressively expanded, etc. But then he gives examples where companies aggressively expanded, but had a poor outcome, and we criticize them for the same thing we just praised another company with positive performance for. In short, our explanations for success/failures are usually just based on signals of performance like stock price. The so called “science” we use to rationalize why a company performed poorly or well is junk and often contradictory.

What annoyed me about the book was the bulk of it seemed to be about how the way we think about things is crap and we just change our minds once performance goes the opposite direction. But I kept waiting and waiting for some solutions to these problems. He got to the point at the end of the book, and I mean the very end. The last page.

There is a nice summary of some of his key points on the last page that I will type below:

If independent variables aren’t measured independently, we may find ourselves standing hip-deep in halos.

I think what he was getting at here is we can argue that factor X caused 20% growth, and factor Y causes 20% growth, so combine them and we should expect 40% growth. Where in reality, factor X may be highly correlated to factor Y, and cause much of the growth attributed to factor Y. So absolute growth may be more like 30% with the two correlated factors.

If the data are full of halos, it doesn’t matter how much we’ve gathered or how sophisticated our analysis appears to be

He isn’t talking to us as readers with that quote. He is talking to Jim Collins, who often boasts at the beginning of his books at how high the stacks of his research were. Rosenzweig says “Who cares. Lots of bad data doesn’t equal good findings.” I tend to agree.

Success rarely lasts as long as we’d like – for the most part, long-term success is a delusion based on selection after the fact

Another dig at Jim Collins and Built To Last.

Company performance is relative, not absolute. A company can get better and fall further behind at the same time

The example he gave for this point was K-mart. Many people criticized them in their dying days for failing to innovate, get better logistics, etc. But in reality, K-Mart did improve in almost all financial/operational metrics. It just didn’t improve to the same degree as Wal-Mart, Target, etc and died anyways.

Anyone who claims to have found laws of business physics either understands little about business, or little about physics, or both.

His point here is that business is not a science. There are way too many chaotic factors that unfortunately do not allow us to read Bill Gates memoir, learn his tricks, and build dominant companies.

Searching for the secrets of success reveals little about the world of business but speaks volumes about the searchers – their aspirations and their desire for certainty.

Like I said, the majority of the book annoyed me as it felt like everything we think is wrong, and nothing we believe about success or failure in business is true. But as I reflected on it, I came to think of the book of more of a psychology book, imploring us to think a bit more deeply about our rationalizations of business performance. Why do we try so hard to make a formula for success or failure?

Rosenzweig argues it is our desire for certainty. We take comfort in our ability to explain. We like stories of enduring companies led by people just like us, who work hard, are determined and humble, and have big hairy audacious goals.

After reading this, I have no intention of rejecting the wisdom that can be found from Jim Collins (I really liked Great by Choice) or other business books. But I will try to keep some of the lessons of this book at the back of my mind, lest I write a book one day and have Rosenzweig dedicate two chapters of his book explaining why I am wrong.