Startup general interest

Beware the halo effect

By October 19, 2009 4 Comments


There is a good piece in the Economist today on how misleading first impressions can lead to bad decisions due to the halo effect, particularly in recruitment and when assessing company performance.

First a definition:

[The halo effect] is the phenomenon whereby we assume that because people are good at doing A they will be good at doing B, C and D (or the reverse—because they are bad at doing A they will be bad at doing B, C and D). The phrase was first coined by Edward Thorndike, a psychologist who used it in a study published in 1920 to describe the way that commanding officers rated their soldiers. He found that officers usually judged their men as being either good right across the board or bad. There was little mixing of traits; few people were said to be good in one respect but bad in another.

It is pretty obvious that in practice the truth is more nuanced, very few people are good at everything.  This phenomena is particularly relevant for startups where senior execs have to wear many hats (as an aside – in my opinion the many hats aspect of startups puts a premium on raw ability over experience, hard to assess as it may be).  The widespread negative impact of the halo effect on startups was noted in the Harvard Business Review in 2002 (also from the Economist):

In our experience, CEOs, presidents, executive VPs and other top-level people often fall into the trap of making decisions about candidates based on lopsided or distorted information … Frequently they fall prey to the halo effect: overvaluing certain attributes while undervaluing others.

We also need to be aware of the halo effect when assessing successful startups, again from the Economist:

Much of our thinking about company performance is shaped by the halo effect … when a company is growing and profitable, we tend to infer that it has a brilliant strategy, a visionary CEO, motivated people, and a vibrant culture. When performance falters, we’re quick to say the strategy was misguided, the CEO became arrogant, the people were complacent, and the culture stodgy

Again the truth is more nuanced.  Even highly successful startups are like the proverbial curates egg – good in parts.  This is something that can get forgotten with other startups blindly copying elements of today’s hottest company.  Equally on the downside, most businesses that fail probably had some good parts to them, particularly if they were venture backed.  For this reason having been part of a failed company can still be a net positive on your CV if you were involved in the good stuff there.

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