The peaks and troughs of semester 3 give a student a little time to catch up on interesting areas that s/he may have touched on in the first year, but did not explore as part of the marked syllabus. I have decided it’s important to let these interests influence my choices of electives and dissertation topic. In semesters 1 (eg. week 6) and 2 (i.e. week 32), I came across the studies of two consultants, Sorcher and Brant, who wrote ‘Are You Picking the Right Leaders?’ for Harvard Business Review in 2002. In the article, they refer to the ‘Halo Effect’. Wikipedia explains that this is a cognitive bias whereby we assume that “a particular trait is influenced by the perception of the former traits in a sequence of interpretations”. That is to say, we assume that because people are good at doing one thing, they will be good at doing all these others things.

At the start of this week, I completed the Private Equity module, during which the lecturer pointed out that to operate in a competitive venture capital environment, failure to take measured risks would only ensure lack of success. He spoke of an investment bank that had recruited a successful executive from their fixed income team to take control of their private equity interests. During his tenure, not one venture capital investment was made. Of course, uncertainty can be paralysing, but that is not my concern here. Rather, I am interested in the halo effect at play. The psychologist Edward Thorndike first coined the phrase in the 1920s, when he used it to describe the way that commanding officers rated their soldiers. He found that officers usually judged their men as being either good right across the board or bad. There was little mixing of traits; few people were said to be good in one respect but bad in another. Sorcher and Brant refer to this as, “overvaluing certain attributes while undervaluing others”.

I have now also read Phil Rosenzweig’s unconventional management book ‘The Halo Effect’. For all of you constructive sceptics out there (yes it is possible), it is an absorbing read. He takes the notion of this overvaluation one step further and challenges much of our thinking about company performance.

“When a company is growing and profitable, we tend to infer that it has a brilliant strategy, a visionary CEO, motivated people, and a vibrant culture. When performance falters, we’re quick to say the strategy was misguided, the CEO became arrogant, the people were complacent, and the culture stodgy.”

This should raise an eyebrow of a case and model-laden MBA student. While this delusion could easily be seen as a harmless, throwaway observation, Rosenzweig explores how such a bias might systemically undermine success. Might company performance create a halo that shapes the way we perceive strategy, leadership, people, culture, and more?

Drawing on examples from leading companies including Cisco IBM and Nokia, Rosenzweig shows how widespread this bias has become. He argues that this undermines the usefulness of the ‘guru’ management books from Peters and Waterman’s ‘In Search of Excellence’ to Jim Collins’s ‘Good to Great’. Even more unconventionally, Rosenzweig goes on to suggest that because these bestsellers claim to have identified the drivers of success, rather than just recounting stories of high performance, these books actually amplify the delusion.

Almost mocking the format of such business books, Rosenzweig identifies 9 popular business delusions. A couple of my favourites are as follows:

• The Delusion of Absolute Performance – Company performance is relative to competition, not absolute, which is why following a formula can never guarantee results.
• The Delusion of Single Explanations – Studies that show how a particular factor (e.g. customer focus) leads to improved performance, inevitably discount how other factors are highly correlated. The effect of each one is usually less than suggested.

As a consultant and a student, I am currently looking at how professional services firms address innovation. Are we sure that the same personality types that can be innovative within the constraints of professional client service can also deliver strategic innovation? I would not take it for granted – the two scenarios would seem to be addressing two completely different levels of risk. Moreover, I think that any such ‘delusion’ might be exacerbated by inherent biases in the professions – professionals tend to be well read and no doubt feel they have the intellectual capacity to do most things well if they wanted to; but then uncertainty can do strange things to capacity. Beware the halo effect.