On the Halo Effect

by F.

B-School academics are an interesting bunch. For every Hal Varian or Richard Thaler or Barry Nalebuff (all of whom have more insights between lunch and dinner than most of us will have in a lifetime), there are, it seems, a huge number of fakes. While I’m pessimistic that the supply of fakes will diminish anytime soon, books like The Halo Effect should help. I’ve blogged about the author before here, and now CFO magazine has a nice summary. Note a couple of key points:

  • “Of 35 ‘Excellent’ companies studied in In Search of Excellence, 30 declined in profitability over the 5 years after the authors’ study ended in 1979….”
  • “…of 17 of the 18 ‘Visionary’ companies studied in Built to Last, only 8 outperformed the S&P 500 market average for the 5 years after the authors’ study ended in 1990.”

CFO piece also gives a nice “Taxonomy of Delusion:”

The Halo Effect. The tendency to look at a company’s overall performance and make attributions about its culture, leadership, values, ad more.

Correlation and Causality. Two things may be correlated, such as employee satisfaction and company performance, but we may not know which one causes which.

Single Explanations. Many studies show that a particular factor leads to improved performance. But since many of these factors are highly correlated, the effect of each one is usually less than suggested.

Connecting the Winning Dots. It’s not enough to compare successful companies to isolate reasons for their success; you have to compare successful companies with less-successful ones.

Rigorous Research. Research is only as good as the quality of the data.

Lasting Success. Almost all high-performing companies regress over time.

Absolute Performance. Company performance is relative, not absolute. A company can improve and fall further behind its rivals at the same time.

The Wrong End of the Stick. Successful companies may often pursue highly focused strategies, for example, but that doesn’t mean highly focused strategies often lead to success.

Organizational Physics. Company performance doesn’t obey immutable laws of nature and can’t be predicted with the accuracy of science.