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The Halo Effect: . . . and the Eight Other Business Delusions That Deceive Managers Paperback – June 17, 2014
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"I was taken by this book. It destroys myths concerning the attribution of success in the management literature using potent empirical arguments. It should stand as one of the most important management books of all time, and an antidote to those bestselling books by gurus presenting false patter and naive arguments." -- Nassim Nicholas Taleb, author of "Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets"
"In "The Halo Effect", Phil Rosenzweig has done us all a great service by speaking the unspeakable. His iconoclastic analysis is a very welcome antidote to the kind of superficial, formulaic, and dumbed-down matter that seems to be the current stock in trade of many popular business books. It's the right book at the right time." -- John R. Kimberly, Henry Bower Professor of Entrepreneurial Studies, The Wharton School, University of Pennsylvania
"Rosenzweig doesn't only poke fun at the mass of bad writing and bad science in the management world. He explains why it is so bad -- and how you can learn from it, despite the efforts of the authors." -- John Kay, "Financial Times" columnist and author of "Everlasting Light Bulbs: How Economics Illuminates the World"
"In "The Halo Effect," Phil Rosenzweig has done us all a great service by speaking the unspeakable. His iconoclastic analysis is a very welcome antidote to the kind of superficial, formulaic, and dumbed-down matter that seems to be the current stock in trade of many popular business books. It's the right book at the right time."-- John R. Kimberly, Henry Bower Professor of Entrepreneurial Studies, The Wharton School, University of Pennsylvania
About the Author
Visit The-Halo-Effect.com to download a user’s guide to The Halo Effect for your company or classroom, or to join a discussion forum about delusions in the business world.
- Publisher : Free Press; Reissue edition (June 17, 2014)
- Language : English
- Paperback : 288 pages
- ISBN-10 : 1476784035
- ISBN-13 : 978-1476784038
- Item Weight : 8.8 ounces
- Dimensions : 5.5 x 0.8 x 8.38 inches
- Best Sellers Rank: #713,537 in Books (See Top 100 in Books)
- Customer Reviews:
Top reviews from the United States
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Using the examples of Cisco, ABB, and others, the author demonstrates the phenomenon. When times were good—strong revenue growth and a soaring stock price—these companies were praised for their exemplary strategy, culture, and CEO. When financial performance fell, the same strategy, culture, and CEO were ripped apart as severely flawed.
Why does this happen? Because we love stories. “As long as Cisco was growing and profitable and setting records for its share price, managers and journalists and professors inferred that it had a wonderful ability to listen to its customers, a cohesive culture, and a brilliant strategy. And when the bubble burst, observers were quick to make the opposite attribution. It all made sense. It told a coherent story.”
“Yet there’s a bit more to it. Our desire to tell stories, to provide a coherent direction to events, may also cause us to see trends that do not exist or infer causes incorrectly. We may ignore facts because they don’t fit into our story.”
How does this happen? Introducing the Halo Effect. “During World War I, an American psychologist named Edward Thorndike was conducting research into the ways that superiors rate their subordinates. In one study, he asked army officers to rate their soldiers on a variety of features: intelligence, physique, leadership, character, and so on. He was struck by the results. Some men were thought to be ‘superior soldiers’ and were rated highly at just about everything, while others were thought to be subpar across the board… Thorndike called it the Halo Effect.”
The Halo Effect is “a tendency to make inferences about specific traits on the basis of a general impression. It’s difficult for most people to independently measure separate features; there’s a common tendency to blend them together. The Halo Effect is a way for the mind to create and maintain a coherent and consistent picture to reduce cognitive dissonance… It’s also a heuristic, a sort of rule of thumb that people use to make guesses about things that are hard to assess directly.”
“Fortune claims that the World’s Most Admired Company survey is ‘the definitive report card on corporate reputations.’ … For all the appearance of rigorous research—thousands of executives providing responses to nine separate questions, which are then combined for an overall ranking—there’s a serious Halo Effect. Respondents may be asked nine questions, but it’s unlikely that they have nine different opinions about the company. More likely is that one or two general impressions are expressed nine times. Moreover, the most important opinion is likely to be based on overall financial performance. Look at any company with healthy revenues and strong profits, and it’s likely that I’ll infer it has good management, high quality products, and more… Two different studies showed that a company’s financial performance explained between 42 and 53 percent of the variance of the overall rating.”
“So many of the things that we—managers, journalists, professors, and consultants—commonly think contribute to company performance are often attributions based on performance.”
This leads us to the Delusion of Correlation and Causality. “If we want to test whether customer orientation leads to high performance, the last thing we should do is ask managers: ‘How customer oriented is this company?’ We’re likely to get an attribution based on performance. To have any validity at all, we need to rely on measures that are independent of performance.”
“But suppose we look at a measure that is not tainted by Halos—say the rate of employee turnover—and we find a high correlation with performance. Now the challenge is to untangle the direction of causality… As long as we gather data at one point in time—cross-sectionally—we won’t know.”
“One way to improve our ability to explain causality is to gather data at different points of time so that the impact of one variable on some subsequent outcome can be more clearly isolated. This approach, called, longitudinal design, is more time-consuming and expensive to carry out, but it stands a better chance of avoiding mistaken inferences from simple correlation.”
Next, there’s the Delusion of Absolute Performance. “Companies are often described as succeeding or failing on the merits of their actions alone, as if performance were absolute. But in a competitive market economy, the performance of one company is always affected by the performance of other companies.” It’s all relative.
Kmart is a good illustration of this point. Kmart improved inventory turns from 3.45 in 1994 to 4.56 in 2002, a 32% improvement. Impressive, right? “Over the same eight years, Wal-Mart’s inventory turns went from 5.14 all the way to 8.08, up 63 percent. Wal-Mart had faster turns at the start of the eight-year period than Kmart had at the end. Kmart got better in absolute terms and yet fell further behind at the same time—and the gap between the two retailers was growing ever wider.”
“The Delusion of Organizational Physics implies that the business world offers predictable results, that it conforms to precise laws. It fuels a belief that a given set of actions can work in all settings and ignores the need to adapt to different conditions: intensity of competition, rate of growth, size of competitors, market concentration, regulation, global dispersion of activities, and much more. Claiming that one approach can work everywhere, at all times, for all companies, has a simplistic appeal but doesn’t do justice to the complexities of business… Execution, like strategy, doesn’t lend itself to predictable cause-and-effect relationships.”
The Delusion of Lasting Success: “In a free market system, high profits tend to decline thanks to what one economist called ‘the erosive forces of imitation, competition, and expropriation.’ Rivals copy the leader’s winning ways, new companies enter the market, consulting companies spread best practices, and employees move from company to company.”
The book also includes: the Delusion of Single Explanations, the Delusion of Connecting the Winning Dots, the Delusion of Rigorous Research, and the Delusion of the Wrong End of the Stick.
Rosenzweig hopes this book will “help managers think for themselves.”
The book then goes on to present the nine delusions excerpted below:
"Delusion One: The Halo Effect - The tendency to look at a company's overall performance and make attributions about its culture, leadership, values, and more. In fact, many things we commonly claim drive performance are simply attributions based on prior performance.
Delusion Two: The Delusion of Correlation and Causality - Two things may be correlated, but we may not know which one causes which. Does employee satisfaction lead to high performance? The evidence suggests it's mainly the other way around - company success has a stronger impact on employee satisfaction.
Delusion Three: The Delusion of Single Explanation - Many studies show that a particular factor - strong company culture of customer focus or great leadership - leads to improved performance. But since many of these factors are highly correlated, the effect of each one is usually less than suggested.
Delusion Four: The Delusion of Connecting the Winning Dots - If we pick a number of successful companies and search for what they have in common, we'll never isolate the reasons for their success, because we have no way of comparing them with less successful companies.
Delusion Five: The Delusion of Rigorous Research - If the data aren't good quality, it doesn't matter how much we have gathered or how sophisticated our research methods appears to be.
Delusion Six: The Delusion of Lasting Success - Almost all high performing companies regress over time. The promise of a blueprint for lasting success is attractive but not realistic.
Delusion Seven: The Delusion of Absolute Performance - Company performance is relative, not absolute. A company can improve and fall further behind its rivals at the same time.
Delusion Eight: The Delusion of the Wrong End of the Stick - It may be true that successful companies often pursued a highly focused strategy, but that doesn't mean highly focused strategies often lead to success.
Delusion Nine: The Delusion of Organizational Physics - Company performance doesn't obey immutable laws of nature and can't be predicted with the accuracy of science - despite our desire for certainty and order."
Every now and then one comes across a book, that makes its reader take a step back and re-assess his views, experiences and readings. The Halo Effect is one of these books. It delivers both on account of the content and also of the numerous corporate examples and references to leading work in the leadership/management space to illustrate the concepts presented. A very refreshing and highly recommended read!
Below are excerpts from the book that I found particularly insightful:
1- "In fact, for all the secrets and formulas, for all the self-proclaimed thought leadership, success in business is as elusive as ever."
2- "...There was talk, over and over, about customer orientation and leadership and organizational efficiency, but these things are hard to measure objectively, so we tend to make attributions about them based on things we do feel certain about - revenues and profits and share price. We may not really know what leads to high performance, so we reach for simple phrases to make sense of what happened."
3- "If we start with the full data set and look objectively at many years of company performance, we find the dominant pattern is not one of enduring performance at all, but one of rise and fall, of growth and decline. Foster and Kaplan conclude: "...Managing for survival, even among the best and most revered corporations does not guarantee strong long term performance for shareholders. In fact, just the opposite is true. In the long run, the markets always win"."
4- "March and Sutton explain: "In its efforts to satisfy these often conflicting demands, the organizational research community sometimes responds by saying that inferences about the causes of performance cannot be made from the data available, and simultaneously goes ahead to make such inference.""
5- "We can't turn back the clock, change one variable, and then run the experiment again...It's easy to blame one man for a company woe's, but these sorts of attributions, while appealing for their simplicity, may not provide the best basis on which to manage a company."
6- "...An organization isn't a system of mechanical parts, interchangeable and replaceable. It's better understood as a sociotechnical system, a combination of mean and machines, of people and things, of hardware and software, but also of ideas and attitudes. Some technical elements can often be copied and applied with predictable results...but when we begin to examine how those technical systems interact with social systems, with people and values and attitudes and expectations, the results are harder to predict."
7- "Managers quite naturally find it easier to keep the attention on execution, which everyone will always agree can be done better."
8- "What leads to high performance?...we're left with two broad categories: strategic choice and execution...In spite of our desire for simple steps, the reality of management is much more uncertain that we would often like to admit - and much more so that our comforting stories would have us believe."
9- "As Tom Peters observed: "To be excellent, you have to be consistent. When you're consistent, you're vulnerable to attach. Yes, it's a paradox. Now deal with it.""
Top reviews from other countries
This book provides a major warning that recipes for success in these books are often misleading. It's particularly critical of best sellers like "In Search Of Excellence", "Built To Last" and "Good To Great" for their research methods and extravagant claims.
The problem is the title of the book - the halo effect. It seems that generally people assess successful, growing, profitable companies as having a wide range of virtues while struggling companies must be weak at many things. It sounds sensible but problems occur when a good company becomes bad, despite carrying on with all the virtues.
The book correctly identifies as a big issue that companies don't operate in a vacuum. A company can improve in many different ways but still fall behind an existing competitor or new entrant to the market. It then goes on to talk about the importance of both strategy and execution. Getting one right isn't enough and strategic choices are inevitably uncertain. I welcome this focus on strategy although the development of that body of knowledge isn't without its difficulties.
The book also briefly looks at something that is the focus of Goldrat's Theory Of Constraints. At any time, there is one big leverage point - the constraint - and improvements away from that area will have a disappointing impact.
The author then goes on to look at three successful executive who do things the right way because of their process of recognising opportunities and the associated risks.
I can understand why people give the book a five star rating. I haven't because I'd have liked to have seen more discussion on doing the right things in the right way. Much more time is spent knocking down than building up. I feel this might give people the wrong impression. There is plenty to learn from reading business books and they can inspire people to question what they are doing and what they need to be doing in the future. Many books are bought and not even started, probably more are started and not finished.
I believe you can learn from what people have done to create business success and what others have done or not done that leads to failure. You don't have to keep reinventing the wheel. However the right things to do are dependent on your own situation. Just like in medicine, applying the right cure to the right situation is likely to work, the wrong prescription to a problem won't solve it and may make things worse.
Paul Simister, a business coach who helps business owners who are stuck, get unstuck.
So Rosenzweig's scepticism of the established approach, of describing the attributes of successful companies as a primary means of answering the question why some companies prosper while others fail, is convincing. He argues the case well for scepticism of a number of common delusions, the most basic of them all being the Halo Effect - a natural human tendency to make attributions based on cues we think are reliable. But beauty is in the eye of the beholder. When times were good ABB was a New Age wonder with a great corporate culture, a futuristic organisation and a hero at the helm. When it collapsed ABB was remembered as having a complacent culture, a chaotic organisation and an arrogant leader. ABB had not changed much but the conventional wisdom changed rapidly.
With a wide assortment of specific references to individual companies and people, which maintains the interest in the book, he takes us through the delusions of correlations and causality, single explanations, connecting winning dots, rigorous research and lasting success.
He credits many of the classic business books and deluge of autobiographies of iconic business leaders as being good stories but claims as science they are deeply flawed. They focus attention on the wrong priorities and lead managers in dangerous directions.
Rosenzweig is strong on sceptiscm. But that is the easy bit. What does lead to high performance?
His answers are firstly the risky business of strategic choice - fundamental decisions that set a company apart from its rivals. Strategic decisions are inherently risky - the risk of customer appeal and acceptance, of competitor reaction, of technological change. And it is the assessment and acceptance of this risk with the consequent possibility of failure which sets companies apart. Many fail and the fear of failure is one of the strongest motivators.
And secondly the uncertainties of execution. Flawless execution is, of course, applauded in many books. But Rosenzweig argues it is not the importance of flawless execution across the board, it is the identification of the few elements of execution that are most important to deliver a chosen strategy.
The thrust of the book certainly resonates with my business experience, if underestimating the importance of time, effort and imagination in formulating and constantly revisiting strategic choices. But it is an engrossing read. If it helps you think for yourself then it must be a worthwhile read.
Whether it is "In search of excellence", "Built to Last" or "Good to great", by the end of this book you will I reckon have a more questioning attitude to such works (if not 100% cycnical) because this book challenges many preconceptions and makes you think and look afresh at how one will ever achieve success in business management.
The theme is not just "cutting tall poppies" down to size, but more basically that nothing is as simple or easy as many have claimed in writing such books. His chapter on why "strategy" and "execution" are actually so hard to do well, is alone worth the price of the book for me.
The core argument of the "delusions" being based on too much retropsective story telling is bought full circle by the three examples at the end of companies and business leaders who have in the authors opinion sought to face reality and do not underestimate the uncertainty that faces everyone.
A highly recommended book since it makes its points thoroughly and cogently and as such comes over as thoughtful and provoking of fresh views - as such it is a welcome change from too many of the best selling tirade type books that have come to represent both business but also political and history bestsellers recently. Definitely a book that is long overdue and one hopes will be succesful plus lead to more realism in such future writing.
This would not be too bad, except that many academics rely heavily on the business press as the raw data for their research. After all, it is very difficult, if not impossible, to run true scientific experiments in real life business settings. So academics rely on the business press and their own investigations (much of which are also subject to the Halo Effect) and the situation becomes self perpetuating and the Halo Effect becomes even greater.
The main tenet of this book is to investigate the rationale that underlie many of our most well known business textbooks (e.g. In search of excellence, Built to last, Good to great) and points out the flaws in the logic that underpin many of these books.
Personally, when any business text claims to have the "checklist to success", I always take it with a pinch of salt. The science might be somewhat lacking, however, they do tell a great story (well, the better ones do!). So my faith in business books may not have been that seriously undermined, however, I did find this book a thoroughly interesting read.
Rozenzeig, methodically takes apart both the media commentators and business book authors who talk-up certain 'great' features of successful leaders and then quote the very same features as bad if those leaders encounter a downturn in fortune.
The litmus test Rozenzweig applies is simple, Do these same writers PREDICT either the success or failure of important business leaders? The evidence shows they do not, they simply create a story to explain the rise or demise of leaders in an effort to have SOMETHING to say about it in order to maintain their 'expert' status.
Rozwenzweig clearly demonstrates that all experts can be fooled by randomness especially when its driven by the need to produce a plausible story for a publication deadline or justify a new consulting method to create sales.
This book has serious implications for all business media writers and business book authors, but more importantly for the rest of us who read the statements telling us what happened, we must now take what they say with a bucket of salt and look beyond the story for the evidence.
The book is well written,informative and logical. Every MBA student needs to study this. This book is now compulsory reading for all my staff