Misunderstanding the Nature of Company Performance: The Halo Effect and other Business Delusions

Much popular thinking in the business world is shaped by delusions—fundamental errors of judgment that distort our understanding about company performance. One of the most important delusions is the halo effect, which is the tendency to attribute many positive features to successful companies, and to make the opposite attributions when companies falter. The halo effect, in turn, contaminates the data used in many largescale studies of company performance, including some of the most popular studies of recent years. The result is a misplaced belief that companies can follow formulas to achieve high performance, when in fact performance is better understood as relative, not absolute. To achieve high performance, companies must do more than follow formulas—they must differentiate themselves from rivals by making choices under conditions of uncertainty.