An Obstacle to Evidence-Based Management: The Halo Effect Phil Rosenzweig Professor at IMD in Lausanne, Switzerland

Evidence-based management can be a powerful tool—but only if we’re clear about what constitutes valid evidence. Unless we can distinguish “hard facts” from questionable data, we may not get very far, no matter how good our intentions may be.

That’s one of the main ideas in my new book, The Halo Effect … and the Eight Other Business Delusions that Deceive Managers (Free Press, February 2007). In it, I show that many business books—including some of the biggest best-sellers of recent years—are based on questionable evidence and reach dangerously misleading conclusions.

The most basic problem is known as the Halo Effect, which is the natural human tendency to make specific judgments based on an overall impression. When a company is doing well, with rising profits and a soaring share price, most people infer that it has a brilliant strategy, a visionary leader, a motivated workforce, strong execution skills, and more. But when that same company falters, observers are quick to make the opposite attributions: they say that the strategy was misguided, the leader became arrogant, the people were complacent, execution was sloppy, and more. In fact, little may have changed. Rather, financial performance bestows a Halo that leads to powerful attributions. The Halo Effect has serious implications: many of the things we commonly think drive company performance—leadership, corporate culture, customer focus, and more—are often better understood as attributions based on performance.

In my book, I show how the Halo Effect shaped many articles and case studies about two prominent companies, Cisco Systems and ABB. My chief complaint, however, is not with journalists, but with the researchers who rely on these questionable sources of data. Some recent best-sellers congratulate themselves for the large amount of data they collected, but overlook the fact that if the evidence isn’t solid, it doesn’t matter how much was gathered. (That’s Delusion #5: The Delusion of Rigorous Research.)

Reliance on faulty evidence leads to other errors in our thinking about business performance. It can lead to a mistaken belief that companies can follow a “blueprint” to achieve enduring greatness (#6: The Delusion of Lasting Success.) It can lead to an assertion that companies can follow simple formulas to achieve high performance, when in fact performance is always shaped by the actions of competitors (#7: The Delusion of Absolute Performance). Indeed, some blockbusters from In Search of Excellence to Good to Great are fundamentally flawed because they relied on data from sources that are commonly contaminated with the Halo Effect. These books may offer tales of inspiration that managers may find comforting and inspiring, but they’re based on shaky evidence.

One vital lesson, for managers as well as researchers, is to insist that the quality of our evidence is sound. For starters, we have to make sure that our independent variables are truly independent of what we are trying to explain. Regrettably, many popular business studies fail in this regard: they rely on data that is tainted by the Halo Effect, and as a consequence, miss a basic tenet of evidence-based management.
 

Posted on February 5, 2007

 

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