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Blinded by the Halo Effect

Posting Date: June 13, 2007

For a brief time in March 2000, Cisco Systems was the largest company in the world, with a market capitalization of $555 billion. Business experts attributed its spectacular performance to visionary leadership, an extraordinary culture, and unparalleled customer focus. Less than a year later, as Cisco’s stock price tanked and sales plummeted, those same experts said its problems were due to an arrogant leader, a dysfunctional culture and a lack of customer focus. Did Cisco really change so drastically overnight, or were its critics blinded by the halo effect?

The halo effect is “the general human tendency to let an overall impression shape specific judgments,” says Phil Rosenzweig, author of The Halo Effect…and the Eight Other Business Delusions that Deceive Managers (Free Press, 2007). To get a sense of what that means, consider the following example Rosenzweig gives in his book. A researcher conducted an experiment that asked groups of participants to perform a certain activity. Then, the researcher randomly told some participants that they had done well and others that they had done poorly—when in fact, all participants had done equally well.

When asked to describe how well their team had worked together, the groups that had been told they had done well reported that their team was highly cohesive, with good communication and superior motivation. But the groups that had been told they had done poorly reported that their group lacked cohesion and suffered from poor communication and a lack of motivation. Knowledge of the outcome, in other words, had biased each team’s interpretation of their performance.

“In fact, a lot of the things that we say drive business performance are actually attributions based on performance,” says Rosenzweig, a professor of strategy and international management at the International Institute for Management Development in Lausanne, Switzerland. “That’s simply because there’s a lot of things in business—leadership, corporate culture, execution—that are kind of fuzzy concepts. It’s hard to measure them separately from company performance.”

In the example of Cisco, observers attributed its strong performance to strong leadership, among other factors. In actuality, it was the reverse—the company’s performance enhanced the general perception of Cisco’s leadership.

According to Rosenzweig, the halo effect pervades many best-selling books, such as Built to Last and In Search of Excellence, that purport to explain the secrets of high performing companies. Such books tout their claims as backed by careful research, but the data on which they base their findings is seriously flawed.

“The first time I read [Built to Last] I thought it was pretty good, but I had the feeling that there was something wrong that I couldn’t quite put my finger on,” says Rosenzweig. “After a while, I realized what the problem was. The book was presenting itself as rigorous research, but I realized that there was a problem with the quality of the data. The quantity of the data was impressive, but the quality wasn’t very good.”

The problem is that such books are drawn in large part from sources that are prone to seeing halos. The business press is one such flawed source. Publications such as BusinessWeek and Fortune routinely write glowing reviews of successful companies, crediting their performance to leadership and culture. Taking that judgment at face value, management gurus make it the basis of the “immutable laws of high performance” promised in their books. The claim that great leadership leads inevitably to great performance, for example, is presented as absolute and ironclad.

As comforting as it might be to believe that there are guaranteed ways to achieve high performance, the reality, however, is different. “What those books leave out is some things that don’t fit into the neat formulas that they want to offer,” Rosenzweig says. “It’s also important to make choices under uncertain conditions that involve risk. A lot of these books don’t want to talk about that, because they want to present the idea that if you do these six things, or these eight things, there will be predictable results that follow. That’s just wrong. It’s wrong because performance is relative, not absolute, and in a competitive market economy you have to think about rivals.”

Rosenzweig is careful to point out that he doesn’t necessarily disagree with the fundamental argument that factors such as leadership and culture are related to high performance, only with the idea that the relationship is one of causality. “The danger there is that we use terms without defining them well,” says Rosenzweig. “We assume that there’s a causality in one direction when in fact it may be in the other. We don’t force ourselves to use concepts in a rigorous and valid fashion.”

While such books can have value as inspirational tales, Rosenzweig says, they don’t have much to offer in the way of strategic direction. “Business performance is fundamentally relative,” he says. “There’s nothing in the analysis of these books that gives room for uncertainty and good choices that go bad, and that’s part of business. You can make good choices that turn out badly, but the fact that they turned out badly doesn’t mean they were bad choices.”