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My book review this week is on Phil Rosenzweig’s book The Halo Effect: … and the Eight Other Business Delusions That Deceive Managers. This book is a collection of stories about companies that have experienced surging profits, typically with credit to the CEO, and then, have experienced sharp downfalls, only to find that the same glowing CEO who presided over the surging profits is suddenly the bad guy.

The term Halo effect refers to the human tendency to ascribe positive or negative feelings across the entire spectrum, rather than seeing individual variables, as just that. It is the way that humans manage cognitive dissonance. If sales are great, then customer service, marketing, operations, etc. must also be great. If someone is tall, handsome, and sharply dressed, they must be intelligent as well.

The book chronicles the rise and fall stories of Lego, Cisco, ABB and others. Several takeaways include:

  • If you are structuring a customer survey, remember that most people have a hard time independently measuring different variables.
  • Journalists frequently use stories to report on business developments and they are much more entertaining than data reporting. However, stories tend to make causal assumptions that are not necessarily valid.
  • Businesses and their leaders cannot be put in a petri dish and researched like cancer cells. We may never understand why certain factors lead to higher profits, because businesses operate in a complex global economy with many interdependent variables.
  • We need to avoid confusing causality and correlation. Just because marketing and sales are correlated, doesn’t necessarily mean that higher marketing spend will increase sales.