Book Review: The Halo Effect

The Halo Effect is Phil Rosenzweig’s response to decades of vague, ideological management books. He systemically sifts through case studies and past books, showing how they fall pray to various misconceptions. He closes with a sober guide to business success.

Here’s the paperback and audiobook.

Utility: ⭐⭐⭐⭐⭐ (5/5)

Writing: ⭐⭐⭐⭐ (4/5)

The writing is clear, sharp, and upbeat. Rosenzweig constantly draws from fresh examples, studies, and ideas. He also presents his own, impressive research, which is documented in the appendix. It reminds of Nate Silver’s The Signal and the Noise.

Sometimes, the book feels a little slow. For half the book, Rosenzweig repeatedly goes over examples of the halo effect (I read this section as a sleep-aid). He also droned on and on when disparaging existing books, so much so that it almost felt like a protracted book review. The book feels a lopsided. The key passages on the other delusions are packed into just a few chapters.

The conclusion of the book also feels a little wanting. The “strategy and execution” answer feels vague and unenlightened. It’s also not much better than the results of Evergreen Project, which also reached those two answers. I’m not sure what I would take away as a businessperson, besides the idea that I shouldn’t buy Collins’ book.

Notes

The Halo Effect

Humans are rationalizing creatures. In our quest for easy explanations, we tend to categorize people, objects, and ideas as consistently good or bad. When our impressions in one area—”he’s handsome!”—influence an unrelated area—”he’s also smart!”—we have succumb to the Halo Effect.

Case studies and management guides succumb to the Halo Effect when they analyze businesses. When Cisco or ABB posted strong performances, their businesses were “nimble” and “diversified.” But once they declined, the same strategies were described as “losing focus.”

The Halo Effect can taint explanations of success. Knowing a company’s performance beforehand influences our estimates of subjective variables like employee happiness or company culture. That’s even seemingly-scientific studies based on surveys and literature reviews may nonetheless be collecting worthless halos.

Other Delusions

People seeking a secret formula to business success are often befuddled by delusions. Chief among these is correlation and causation. Explanatory variables should be independent from company performance. The problem with a mere correlation between happy management and performance is that a successful company could just as well make managers happy.

Another delusion is single explanations. Factors like employee satisfaction or company culture are strongly correlated, so it’s misleading to suggest that any one of them can substantially predict outcomes. A study by McGrahan and Porter found that company-level features explained a total of 32% of all variation in performance.

Even companies that do manage to rise above the rest often come crashing down. It’s a simple case of regression to the mean. A McKinsey study compared the S&P 500 in 1957 and 1997. Four decades later, 426 of those companies disappeared and 62 underperformed the index. Another study from the Harvard Business School found that when businesses are ranked by ROI, both high and low performers tend to regress to the mean.

It’s also a mistake to only consider absolute performance. Performance must be measured in relative terms. From 1994 to 2002, Kmart used an array of tested strategies to increase inventory turns by 32%. But, they lagged behind competitors like Wal-Mart and Target who innovated faster and earlier. Most industries are competitive, so companies are and should be judged on their ability to overcome rivals.

Bad Books & Good Advice

Unfortunately, the business management genre isn’t interested in objective science. These books—like In Search of Excellence and Good to Great—use buzzwords, case studies, and flawed methodologies to promise lofty returns. The goal is not to give good advice, but to tell a gripping story.

The key to business success is strategy and execution. A good strategy appropriately reacts to business conditions. If a market is saturated, a good strategy will avoid entry. Good execution follows through on the strategy. It’s much easier to evaluate execution via metrics like production time, cost, and volume.

Critically, there is never a guarantee of success. All management is calculated risk-taking. Certain business practices may improve your strategy and execution, even good managers will often produce bad outcomes.