Halo came to Hamilton's rescue!

Halo Effects on Business, Investing and Product Management

“Men, it has been well said, think in herds; it will be seen that they go mad in herds, while they only recover their senses slowly, and one by one.”- Charles Mackay

In the recent Italian Grand Prix Lewis Hamilton survived a major accident, thanks to the halo which saved him! The halo device met with considerable opposition when it was first introduced to F1 (and other FIA single seater formulae) in 2018 because of the aesthetics and the philosophic step away from fully open cockpits which had always been intrinsic to single-seater racing.

Incidentally I was reading Daniel Kahneman’s Thinking Fast and Slow the other day and came across the term “Halo effect” , which has both positive and negative effects on us!

Kahneman writes –

The tendency to like (or dislike) everything about a person—including things you have not observed—is known as the halo effect. The term has been in use in psychology for a century, but it has not come into wide use in everyday language. This is a pity, because the halo effect is a good name for a common bias that plays a large role in shaping our view of people and situations.

You meet a woman named Joan at a party and find her personable and easy to talk to. Now her name comes up as someone who could be asked to contribute to a charity. What do you know about Joan’s generosity? The correct answer is that you know virtually nothing, because there is little reason to believe that people who are agreeable in social situations are also generous contributors to charities. But you like Joan and you will retrieve the feeling of liking her when you think of her. You also like generosity and generous people. By association, you are now predisposed to believe that Joan is generous. And now that you believe she is generous, you probably like Joan even better than you did earlier, because you have added generosity to her pleasant attributes.

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The term "halo effect" (a.k.a. halo error) was first introduced into psychological-research circles in 1920 in a paper authored by Edward Thorndike titled “A Constant Error in Psychological Ratings.” Through empirical research, Thorndike found that when people were asked to assess others based on a series of traits, a negative perception of any one trait would drag down all the other trait scores.

Let’s see the impact of Halo effects on Business, products and investing…

In Product management / UX :

Especially in case of websites which are one of the important interfaces for business, Halo effect can play out both positively and negatively depending on how designers have factored these!

The halo effect can impact organizations, locations, products and delivery/communications channels, as well as our judgments of other people. If users like one aspect of a website, they're more likely to judge it favorably in the future. Conversely, if users have a particularly bad experience with a site, they'll predict that the site will treat them poorly in the future as well and, thus, will be reluctant to return to the site. In this latter case, even if the site is later redesigned to be better, users will still carry over their negative expectations from their earlier experience

In Investing :

In this social media age, the chances of Halo effect playing out have amplified. SM influencers and and some of the investing legends does influence our investment decisions. Blindly replicating their investment models may not work at all occasions. There would also be a tendency to attribute the halo effect on these influencers/legends! A classic example for this would be Elon Musk, If you ask investors, Elon Musk is a saint. That's because the halo effect is clouding their judgment, which is putting their investment dollars at risk

In Business and Leadership :

Phil Rosenzweig, in his book The Halo Effect, writes –

Perhaps nothing lends itself to the Halo Effect more than leadership. Good leaders are often said to have a handful of important qualities: clear vision, effective communication skills, self-confidence, personal charm, and more. Most people would agree these are elements of good leadership. But defining them is a different matter altogether, since several of these qualities tend to be in the eye of the beholder — which is affected by company performance.

How does the halo effect manifest itself in the business world? Imagine a company that is doing well, with rising sales, high profits, and a sharply increasing stock price. The tendency is to infer that the company has a sound strategy, a visionary leader, motivated employees, an excellent customer orientation, a vibrant culture, and so on. But when that same company suffers a decline—if sales fall and profits shrink—many people are quick to conclude that the company’s strategy went wrong, its people became complacent, it neglected its customers, its culture became stodgy, and more. In fact, these things may not have changed much, if at all. Rather, company performance, good or bad, creates an overall impression—a halo—that shapes how we perceive its strategy, leaders, employees, culture, and other elements

In all these spheres of life, we need to be mindful on how Halo effects can fool us. Again in a Elon Musk's case , he may be very right on many things ( engineering , EV, space exploration etc.) but people can assume that he’s right on everything (including cryptos ) !

Single handedly lifted Dogecoin!

If people are failing, they look inept. If people are succeeding, they look strong and good and competent. That's the 'halo effect.' Your first impression of a thing sets up your subsequent beliefs. If the company looks inept to you, you may assume everything else they do is inept. - Daniel Kahneman

Happy reading and let's strive and ensure that we take advantage of Halo effects for positive outcomes in life!