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1-Page Summary of The Halo Effect

Overview

“If you want to make your company wildly successful, follow these steps. You won’t regret it.”

Many business books make claims that are not supported by evidence. In his book, The Halo Effect, author Phil Rosenzweig attacks the unscientific and unfounded advice found in many business guides. He demonstrates how these seemingly valid conclusions are misleading by pointing out flaws in other books’ research methodologies.

In this book, you’ll see that the author deals with a lot of business-related topics. In fact, his analysis can be applied to other areas of your life as well.

This article will teach you the key points of decision making. It will also reveal why many people fall prey to cognitive biases, and how Intel’s success is due to its strategy of taking calculated risks.

Big Idea #1: Though we all want to know what makes a company successful, there’s no scientific explanation.

Every manager searches for the business Holy Grail, which is a single idea or method that explains in no uncertain terms how to succeed.

People have tried to figure out what makes a business successful. However, many of the reasons given for why businesses succeed are not based on science.

Whereas a scientific process uses experimentation to determine the truth of a statement or hypothesis, pseudoscience relies on anecdotes, stories and data that cannot be shown to be either true or false. A good example of a pseudoscience is astrology, which claims that an individual’s future can be read from the positions of the stars. However, it’s difficult for business leaders to run experiments because they’d have to buy two businesses and use different management strategies with each one in order to draw conclusions about why one succeeds more than another.

Moreover, when business analysts or journalists try to explain a company’s success, they merely describe what the company is doing now. Data only supports what the company has already accomplished.

For example, take the Swedish industrial company ABB. It was one of Europe’s most successful companies in its time, and the reason for that success is a progressive organizational structure and corporate strategy.

However, when the company almost went bankrupt in 2005, those same reasons were given as leading to its downfall. So it’s clear that the reasons for a company’s success aren’t always accurate indicators of what makes it successful.

Big Idea #2: How we determine what makes a company successful is distorted by the “halo effect.”

Teachers often assume that if a student is well-behaved, she must also be smart and friendly. This happens because we can’t analyze more than one feature of something at once. We choose the most tangible feature and extend our judgment to other features, which is known as the halo effect.

It’s easy to fall into the trap of judging a book by its cover. For example, when we look at someone who is physically attractive, we tend to assume that they’re also competent and smart. This phenomenon is called the halo effect.

It is no surprise then that analysts and academics are also susceptible to the halo effect.

How do people make inferences? They focus on the overall performance of a company and then infer other aspects about it, such as its culture, business strategy, values, etc. For example, if a company is doing well financially, there’s a good chance that its human resource department or corporate culture are also exceptional. However in reality this isn’t always true because many companies perform poorly but still have excellent cultures and HR departments.