The Halo Effect: … and the Eight Other Business Delusions That Deceive Managers

It seems like we’re all prone to want to find amazing solutions. Whether it’s Ponce De Leon looking for the fountain of youth, searching for the lost city of Atlantis, or searching for El Dorado, we seek to find the seemingly impossible – and in at least these cases they are impossible. Business books are plentiful. Everyone seems to have an opinion about what will lead to success in business. Many managers and leaders will read these books, and few will get better.

This is at the heart of The Halo Effect: … and the Eight Other Business Delusions That Deceive Managers. Where is the elusive recipe that I can follow that will allow my business to prosper, not just today but in the future as well? How do I build a company that will outperform the stock markets – for the long term? As it turns out, despite the well-meaning advice, no one knows.

The List

Over the years, I’ve read many books that claim to have the answer to what ails business. Many years ago I read the classic book In Search of Excellence. I’ve read Jim Collins’ work Good to Great. I’ve read Patrick Lincioni’s The Five Dysfunctions of a Team – and his book The Advantage. I’ve read Singe’s work The Fifth Discipline: The Art of the Learning Organization. I’ve read Covey’s work The Four Disciplines of Execution. And the list continues:

And this is just the list that claims to have the answers about business. It doesn’t include the books that claim to understand only an aspect of the problem, like marketing. Despite all of this reading and research, I still don’t know what works and what doesn’t work. I don’t have one definitive approach to business that I could replicate and make repeatable. So what’s going on? Am I not focusing enough or is there something else?

Foxes and Hedgehogs

One of the Jim Collins’ more famous recommendations from Good to Great is the fox and the hedgehog. It sounds a lot like the urging in The ONE Thing. The idea comes from Isaiah Berlin’s essay “The Hedgehog and the Fox“. The basic premise is that hedgehogs know one thing really, really well and that foxes know many things well. Collins (as does Keller) believes that those who are successful are good at one thing. They stay focused. There are two issues with this that I’ve discussed before.

First, this focus on one thing contradicts the awareness that most of the innovations today are coming from the intersection of studies – not from absolute expertise in one thing. (For more see The Medici Effect.) If innovations are disruptive to existing business models, but critical for long term success and even business survival, how then can you focus on one thing? The foxes of the world are better at predicting the future. They’re better at finding innovation. They’re better at considering multiple points of view. So how is it that having one focus can possibly be the right answer?

Second, what if you pick the wrong thing to be really, really good at? For instance, the market viability of someone who is an absolute expert at canal shipping is essentially nil. For the most part, we don’t ship things via canals. The Suez and Panama canals are the two quite notable exceptions. So if I’m the world’s foremost expect on canal shipping, my ability to make a living is very narrow. Effectively, you can become the world’s best at something and have it not matter. You can become an expert at something that no one cares about – or at least that no one cares enough about. So the question is, how do you choose what to be focused on?

In a funny twist of fate, it’s the foxes that become hedgehogs – or at least they develop hedgehog-like expertise. Foxes become polymaths. (See Beyond Genius more on polymaths.) They become the Da Vinci’s of the world. They’re most interested in participating in The Medici Effect. They’re the ones that can find their way into solutions that the hedgehogs would never consider.

Of course, if you’re looking at the numbers, it looks like the hedgehogs will be the winners. They make one large bet and get large rewards from it. However, this ignores all of the hedgehogs who made the bet and lost. If you don’t count them – since they don’t make it to the end of the study – you can incorrectly conclude that the hedgehogs are the winners. However, on balance foxes seem to do better. They aren’t outliers on a standard bell curve. They’re the happy middle. They neither fail spectacularly nor do they succeed spectacularly.

The Delusion of Absolute Performance

One of the most persevering fears I have is being outperformed. As a software developer, I was told that the “offshore” developers worked 18 hour days, and that they would stop at nothing to create software solutions. Much like the Loch Ness monster or Big Foot, I’ve found the claims to be greatly exaggerated – but still fear-inducing nonetheless. I wondered how long it would be until I was replaced by an “offshore” worker, or – even more difficult to fight – when computers would start programming themselves as the users spoke what they wanted.

I was learning to be a better developer. With each line of code that I’d write, I’d get better in some small, perhaps imperceptible way. However, I had no way of knowing how fast the developers on the other side of the world were improving. Their cost was one fifth of what mine was. The economics of living in the United States are simply different than those living in India or South America. How could I compete?

This is the fear that is often overlooked. It’s not so much our performance improvement that matters. What matter is the relative improvement we have when compared with the rest of our industry and our peers. Kmart in absolute terms made great improvements in nearly every area of their business – but Walmart in particular made substantially bigger improvements. The result was that Kmart filed for bankruptcy protection, and Walmart continued to soar.

The Results Are In

So what about the results of the businesses profiled in these business books? What about the organizations that have made the leap from Good to Great? How about those that were Built to Last? What about those that were the “found” In Search of Excellence? As it turns out, the results of these organizations after their profile hasn’t been so great.

When looking retrospectively at the performance of the organizations, it was possible to pick out the organizations that excelled – but, as investment advisors are fond of saying, “past performance doesn’t indicate future results.” While it was possible to retrospectively find organizations that were effective for a period of time, that analysis didn’t demonstrate anything that would work forever.

In truth, the best business books aren’t the business books that demonstrate lasting value, advantage, or excellence. The best business books are those that tell compelling stories. We all want stories. The most successful business books of all time have been non-fiction in the sense that they’re about business. However, at the same time, they’re fiction because they are telling believable stories about impossible things – things that are not possible for everyone to do.

The Delusion of Rigorous Research

I vividly remember the title of a book I read many years ago: Lies, Damned Lies, and Statistics. Why do I remember it? I remember it because it represented what I already suspected. Incorrect application of statistics can lead to conclusions that are wildly incorrect. Business books – in my opinion – fall into two categories. There are the books which say, “I’m successful so my thinking works, do what I say.” And there are the other kind of books that say, “We’ve comprehensively analyzed the data, and here’s how to be great at business.”

The first approach works only if you’re already a successful author and business person. It’s a great place to be if you’re already there. However, most people aren’t there, and so they either need to hope people believe they’re credible, or go the exhaustive research route. The problem is that exhaustive research is expensive, difficult to get right, and often inconclusive in its findings. Too frequently, the results of painstaking research simply don’t provide any valuable results.

There are books that claim that they’ve done extensive research, and from this research they’ve identified the five or eight things that every business needs to do to be successful. However, this fails to recognize that sometimes in our world random relationships of variables occur for a temporary period or because the true underlying cause isn’t known.

Consider the high correlation between the number of arrests for public drunkenness and Baptist preachers in the 19^th century. One could easily walk up Chris Argyris’ ladder of inference and conclude that Baptist preachers were driving people to drink, or that more public drunkenness spurred more individuals to become Baptist preachers – though neither is likely correct. (I’ve talked about the ladder of inference a few times. You may find the coverage in my review of Choice Theory easiest to read.) It’s likely that both are related to the rise in population rather than one thing causing another.

Correlation and Causation

As was pointed out in The Black Swan – correlation is one thing, causation is something completely different. Knowing that one thing is related to another is interesting but knowing which thing causes the other – if either do – is more important if you want to change the results. Consider for a moment the housing and financial meltdown that happened in 2007. It all started innocently enough in the 1970s.

The Community Reinvestment Act (CRA) was designed to encourage banks to loan money to all segments of the market, including low and moderate income families. The problem at the time was banks were reticent to loan to folks who earned low wages. This makes sense from a banking perspective, but is also not helpful for the nation at large. (Another case of bounded reality ¡thinking that leads to The Tragedy of Commons – See The Heretic’s Guide to Best Practices for more about boundedly rational.) So the government would monitor practices of banks to ensure that everyone had access to financial instruments. So far so good.

However, somewhere along the line, statisticians entered with the message that home ownership was correlated with economic stability. This is true. Home owners demonstrate a number of economic attributes of stability. However, a leap was made (by whom exactly, it is not clear) that home ownership caused economic stability. As a result, Andrew Cuomo, as the secretary of housing and urban development during the Clinton administration, “encouraged” home mortgage lending to lower and moderate income families, leveraging the threat of aggressive enforcement of the CRA.

And so we all unwittily started a grand experiment about whether home ownership caused economic stability, or whether economic stability caused home ownership . As more and more people got loans for homes everything seemed fine. The loans were being offered right up to the point they were able to repay. It seemed as if things were working well in the subprime lending market.

Home prices rose in response to the increased demand. Interest rates stayed relatively constant. However, it all broke down when home prices started to level off and finally slump. The home owners couldn’t make their payments. They defaulted on their loans. The homes came back to the bank. The bank tried getting rid of the homes and home prices dropped more dramatically.

In fairness to the complete story, the housing bubble shouldn’t have caused a complete meltdown of our financial institutions. That was the greed of the financers that created financial derivatives designed to create more wealth for themselves (and I suppose everyone else). The derivatives hid the real risk behind investments, and as the home loans under the derivatives fell apart, so did they – and fortunes were lost in the balance.

So in this simple example, where we lost sight of the difference between causation and correlation, we melted down the housing market – causing large job losses in the new home construction market. We lost several financial institutions and had a government bailout of several others. We were unwitting researchers in socioeconomics, and our experiment failed. We now know that it’s economically stable thinking that leads to home ownership not the other way around – or rather, we know home ownership doesn’t cause stability. we don’t know with certainty that the opposite is true, or whether they are coincident – neither causing the other.

As an interesting sidebar, home ownership wasn’t expected until the 1950s or 1960s (See America’s Generations for more on the changing expectations of various generations); so the idea that we were experimenting with the impact of home ownership in the 1990s and 2000s seems less odd.

A World of Probabilities

Our minds love order. We love that A+B=C. As a species, we hate the idea that sometimes A+B=C and sometimes A+B=D, and other times – well other times, we have no idea what A+B is equal to. Unless you make your living grinding out money from casinos in Las Vegas, you probably don’t find the idea that outcomes are probable comforting at all. Most of us want to know that our hard work will lead to success. We don’t want to believe that three out of five times we’ll be successful if we just work hard enough for long enough.

That’s simply not satisfying. Why would I work so hard to only have a three in five chance? Even if it’s a four in five chance we don’t like it. Our brain factors out the randomness because it can’t deal with it. (See Thinking, Fast and Slow for more on cognitive biases and the simplifications we do to cope.)

I’ve become painfully aware that sometimes the same set of actions leads to different results. Rogers, in Diffusion of Innovations, spoke of how we can understand the innovation but not understand the impact of it. There are discontinuities that happen which radically change behavior. (Demand speaks to a few of these discontinuities.) The Palm Pilot didn’t dramatically change the way that people managed their lives. Personal Digital Assistants made an impact, but not a real one. By the time we get to the iPhone, we’ve suddenly got the programs, network, and portability together in a way that has all but eliminated the paper-based planners that used to be carried.

Back in 2002, I wrote Mobilize Yourself!: The Microsoft Guide to Mobile Technology. I thought that the explosion of smart phones was right on the cusp. The devices were getting smaller. The batteries were lasting longer. The storage was growing exponentially. However, I missed it. It would be another five to six years before Apple would introduce the iPhone, and in doing so would galvanize a market into action. While all the conditions were right in 2002 for the mobile market to explode, the spark didn’t come until the iPhone. I would have bet on the Microsoft Pocket PC set of devices (as the title and publisher hint at). However, while this was the probable outcome, it wasn’t the actual outcome.

Outside Our Control

It’s uncomfortable. Our egos want to believe that we are in control. (See Change or Die for more on the ego and its defenses.) We want to believe that our rational rider holds the reigns of the only elephant that matters. If we just buckle down and do the work, if we create the right strategy and implement it, then the world be damned, we’ll be successful. However, the more I read (like The Black Swan), the more convinced I become that there’s more than a small amount of business success that comes from external factors. I agree with Pasteur that “luck favors the prepared,” while simultaneously believing that chance – or luck – is far more important a factor in business than anyone wants to admit.

One can attribute the great strategies of Google and Facebook or Cisco and HP to great foresight on the part of the founders. However, when you look deeply into the stories, you find that they were exceedingly lucky in finding the right spot at the right time with the right resources. They didn’t have sophisticated methodology to find the right answers. They just happened upon them.

It’s great to have a recipe that we can follow to get the same results every time. However, the reality of business (and life) is that the circumstances and raw materials change every time. There is so much complexity that there’s no one recipe that will always work. Creating a business that works is a wicked problem. (See Dialogue Mapping for more on wicked problems.) There’s no one path. There’s no set of steps that you can follow.

If you’re willing to be uncomfortable and if you’re willing to put aside certainty, then you may be ready to read The Halo Effect.