Phil Rosenzweig’s The Halo Effect … and the Eight Other Business Delusions That Deceive Managers is largely an exercise of shooting fish in a barrel, but is an entertaining read regardless.
The central premise of the book is that most blockbuster business books (think Good to Great), for all the claims of scientific rigour, are largely exercises in storytelling.
The problem starts because it is difficult to understand company performance, even as it unfolds before our eyes. Most people don’t know good what good leadership looks like. It is hard to know what makes good communication or optimal cohesion or good customer service. The result of this difficulty is that people tend to allow good performance in the areas that they can measure (such as profits) to contaminate their assessment of other company attributes. They endow the company with a halo.
So when a researcher asks people to rate company attributes when they know the business outcome, those ratings are contaminated. If profits are up, people will assign positive attributes to that company. If times are bad, they will assign negative attributes. We exaggerate strength during booms, and faults during falls. All the factors responsible for a company’s rise might suddenly became the reasons for the fall, or be claimed to have never existed in the first place.
As an example, Apple currently has a clean sweep of all nine attributes in Fortune’s “World’s Most Admired Companies” poll – everything from social responsibility to long-term investment value. Is there not a single company in the world that is better than Apple on any of these nine? As Rosenzweig notes, when asked nine questions, people don’t have nine different opinions. They just give their general impression nine times.
Rosenzweig points to one nice experiment by Barry Straw (replicated?), in which Straw asked groups to projects sales and earnings based on financial data. These groups were then given random feedback on their performance. Those with better feedback described their groups as cohesive, motivated and open to change, while those who the experimenter they performed poorly said there was a lack of communication, poor motivation and so on.
Many of the other delusions in the book are likely familiar to someone who knows a bit about stats or experimental design. Don’t confuse correlation and causation. Rigour is not defined by quantity of data. Do not use samples comprising only successes. Social science isn’t physics.
Other delusions are less often stated. Don’t be deluded into believing single explanations. If you added up the explained variance across the various single explanation business studies, you’ll explain 100% of the variance many times over. The explanations are likely correlated. And following a simple formula won’t necessarily work for a business as performance is relative. What if all your competitors also follow the same formula?
The book closes with Rosenzweig’s spin on what leads to company success, which seems out-of-place after the preceding chapters. Some of it makes sense, such as when Rosenzweig points to the need to acknowledge the role of chance, which is almost never threaded into stories of business success. But Rosenzweig’s punchline of the need for strategy and execution feels just like the type of storytelling that he critiques.
Further, when Rosenzweig assesses the performance of three models of good managers – who he approvingly notes share a probabilistic view of the world, realise the role of luck, can make deals under uncertainty, and recognise the need to be vigilant on the changing competitive landscape – it is hard to even agree that all of their actions were successes. Robert Rubin was one of the three. Rosenzweig classes Rubin’s support of the decision to bail out Mexico during the 1995 peso crisis (or more like the exposed US banks – moral hazard anyone?) as a good decision based on the outcome. What is the objective fact not contaminated by a halo? Rosenzweig ends by defending Rubin – who supported deregulation of derivatives trading and was on the board of Citigroup when it was bailed out during the financial crisis – as being more often right than wrong. If nothing else, the strange close to an otherwise good book did give me one more book for the reading pile – Rubin’s In an Uncertain World.