BOOK REVIEW: “The Halo Effect” by Phil Rosenzweig (2009)

Phil Rosenzweig IMDThe Halo Effect gives an excellent insight in to how we make judgments about people, organizations and strategy. It is a must read for any manager or strategy student.


Key words

Strategy, management, leadership, corporate culture, strategy execution, decision making, organizational dynamics, financial performance, psychology, cognitive science, social psychology, behavioral economics, cognitive bias


“The difference between a lady and a flower girl is not how she behaves, but how she‘s treated.”

George Bernard Shaw
Pygmalion, 1916
Strategy at CISCO

Cisco’s quick turnaround – “From hero to zero”

In March 2000 Cisco briefly became the most valuable company in the world. The company was showered with praise by the press for its organizational excellence, discipline and coordination. Exactly one year later its share price had dropped from a high of $80 to a meager $14. Business Week thus reported that Cisco had got out of control with a “Wild West culture”. The company was described as being in chaos, lacking coordination and not listening to its customers.

How could one organization change so quickly? The answer, says Rosenzweig, is that it didn’t. What changed was the way the company was described and that was based solely on its stock price.

Rosenzweig’s very powerful argument is that it is very difficult to fully understand the dynamics of an organization. We therefore base our judgments uniquely on financial results. If a company is making good profits the press will talk of a powerful, dynamic CEO and a strong corporate culture. If the same company is doing badly, the same CEO will be described as arrogant and out of touch. The firm’s corporate culture will be described as poor. He calls this The Halo Effect.

The Halo Effect by Thorndike

The Halo Effect was first described by psychologist Edward Thorndike

The Halo Effect refers to an experiment done by Edward Thorndike during World War I. It shows out tendency to judge people or organizations as being superior based on what we think are independent variables. However, this judgment is often made after the fact.

The Halo Effect gives an excellent insight in to how we make judgments about people, organizations and strategy. It is a must read for any manager or strategy student.

Interesting quotes from the book:

What leads to high performance? It’s the mother of all business questions, a Wall Street equivalent of the Holy Grail. The fact is, it’s often hard to know exactly why one company succeeds and another fails.

 Eliot Aronson observed that people are not rational beings, so much as rationalizing beings. We want explanations. We want the world around us to make sense. It’s not very satisfying to say that today’s stock market movement is explained by random forces.

 Winners are confident, losers are arrogant.

In their 2002 Fortune article, Richard Tomlinson and Paola Hjelt wrote: “Barnevik was never as good as the rave reviews he received in the 1990s, nor was he half as bad as the recent damning press coverage might suggest”.  

What’s the most relevant and tangible information we often have about a company? Financial performance, of course. Whether the company is profitable. Whether sales are growing. Numbers don’t lie, we like to say – which is why Enron, Tyco, and a handful of other recent scandals shake our confidence so deeply. We routinely trust financial performance figures.

 It’s hard to know in objective terms exactly what constitutes good communication or optimal cohesion or appropriate role clarity, so people tend to make attributions based on other data that they believe are reliable.

 Lasting business success, it turns out, is largely a delusion.

Top 500 companies A study by McKinsey director Richard Foster and consultant Sarah Kaplan – guess how many companies on the S&P 500 in 1957 were still on the S&P 500 in 1997, forty years later? Only 74. The other 426 were gone. And of the 74 survivors, guess how many outperformed the S&P 500 over that time period? Only 12 out of 74. The other 62 survived, yes, but they didn’t thrive.

 Success is not random – but it is fleeting.

Pankaj Ghemawat examined the ROI of a sample of 692 American companies over a ten-year period, from 1971 to 1980. He put together one group of top performers, with an average ROI of 39 percent, and one group of low performers, with an average ROI of just 3 percent. After nine years, both groups converged toward the middle, the top performers falling from 39 percent to 21 percent and the low performers rising from 3 percent to 18 percent.

 In a free market system, high profits tend to decline thanks to what one economist called “the erosive forces of imitation, competition, and expropriation”.

The Delusion of Absolute Performance is hugely important because it suggests that companies can achieve high performance by following a simple formula, regardless of the actions of competitors.  

 Stories about company performance appear to be all the more persuasive when they’re dressed up to look like science.

The Delusion of Lasting Success promises that building an enduring company is not only achievable but a worthwhile objective. Yet companies that have outperformed the market for long periods of time are not just rare, they are statistical artifacts that are observable only in retrospect.

Clayton Christensen at Harvard Business School showed that in a wide range of industries, from earth-moving equipment to disk Claytonsen on Innovation drives to steel, successful companies were repeatedly dislodged by new technologies. They didn’t fail because they were badly managed. These so-called disruptive technologies at first didn’t look attractive to established players – they didn’t meet the needs of existing customers and didn’t promise substantial sales and therefore tended to be ignored, yet they improved over time and eventually displaced the existing technology, spelling disaster for market leaders.

The difference between a brilliant visionary and a foolish gambler is usually inferred after the fact, an attribution based on outcomes.

Whenever someone says, “We have the right strategy, we just need to execute better”, I make sure to take an extra close look at the strategy.

 Andy Grove (Intel) commented: “The most important role of managers is to create an environment where people are passionately dedicated to winning in the marketplace. Fear plays a major role in creating and maintaining such passion”. Grove allowed his managers room for initiative, but “he was brutal in demanding that they measure their performance every step of the way”.

My hope is that managers will read business books a bit more critically, free from delusions, their deepest fantasies and fondest hopes tempered by a bit of realism.

 If independent variables aren’t measured independently, we may find ourselves standing in Halos.

Don't be fooled by simple ideas

If you think your strategy is foolproof, the fool may well be you.

Long-term success is a delusion based on selection after the fact.

 Any good strategy involves risk. If you think your strategy is foolproof, the fool may well be you.


I would like to thank my colleague, Mike Kennard, from Aston Business School, for recommending this book. Mike has taught on my course in Grenoble and is an excellent professor.

Phil Rosenzweig The Halo Effect Cisco Barnevik  Grenoble EM  ESC Grenoble  GGSB  Strategy  Blog  Global Ed  International Affairs in Higher Education  Business School  Mark Thomas

See also:


Other Book Reviews

Book review: The Halo Effect … and the eight other business delusions that deceive managers by Phil Rosenzweig

HPO Center: ““One of the most important management books of all time,” claims the book jacket. A bit of an exaggeration perhaps, but it would not be going to far to say that The Halo Effect is a book that should be read by managers as well as scientists, and especially consultants.

The Best Business Book I’ve Read This Year

Organizations and Markets: “Rosenzweig systematically, but politely, demolishes the pretensions of best-selling management books and projects such as In Search of Excellence, Built to Last, Good to Great, and the Evergreen Project.”

The Halo Effect Book Review

Rick Gebhardt: “Common sense principle of “no magic bullet” was stretched pretty far throughout this book. The first half of the book is simply examples of contradictory feelings on companies dependent upon performance and then illustration after illustration of halos existing. This is all good and well, but the point is made pretty quickly and I felt there was a bit of padding here.”


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A fun book that show why humans don’t always behave in a rational manner. An excellent history of finance. Easy to read and lots of interesting examples. Nobel Prize winner and one of the best sellers this year. A must read for any business student.

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