The Halo Effect in Business | Free Essay Example

The Halo Effect in Business

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Topic: Business & Economics
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Abstract

The halo effect in business is a kind of a cognitive bias, which is created as a result of the customer’s tendency to perceive brands, companies, or products relying on the overall impression. The effect appears when the rater develops a holistic opinion before performing a detailed analysis. As a result, detailed performance is evaluated on the basis of the general impression. Aligning the assessment with the initial judgment helps one reduce cognitive dissonance and simplify the picture (O’Donnell & Schultz, 2005). It is highly important for modern businesses to understand how the effect works in order to develop and implement an effective strategy that would address the issue and help use it to the company’s benefit.

Literature Review: The Halo Effect

The phenomenon of the halo effect was first identified and described by the American psychologist Edward Thorndike in 1920 and since then has been continuously studied by researchers from different fields. In most general terms, it describes a tendency to draw conclusions about a person, a company, or a brand based on the initial impression, without any further investigation (Perera & Chaminda, 2013).

Thus, an organization that is doing well in the market and has rising profits and sales typically makes customers believe that it has a strong leader, a well-developed strategy, motivated and committed employees, favorable organizational culture, etc. On the contrary, if the company is in decline, it is believed to have numerous problems, including a wrong strategy, ineffective leadership, HR policy failures, lack of customer orientation, etc. Thus, the company’s performance, no matter if it is negative or positive, creates the halo effect that determines how potential consumers perceive its activities and components (Rosenzweig, 2007).

It is widely accepted by researchers that the idea of a brand serves the purpose of creating means of simplification in order to influence customers’ decisions about opting for this or that product or service. The halo effect is exactly the way to affect consumer evaluations even in cases when no direct benefits are promised. It has been proven by recent research that the halo effect is comprehensive, which implies that it manages to produce a considerable impact on a variety of aspects, including brand extensions, global product quality, country of origin effects, brand-image, associations, etc. (Madden, Roth & Dillon, 2012; Batra, Lenk & Wedel, 2010; Sonnier and Ainslie, 2011).

However, despite the recognized significance of the halo effect, many issues concerning it still remain unclear. There is no universal agreement on whether the effect is universal or it may vary across customer evaluations of various aspects of the brand. For instance, when the consumer opts for a Toyota automobile, does the halo effect created produces a general impact of supreme quality, or are evaluations of performance, safety, economy, style, and other aspects influenced unequally? Since different studies provide different answers to this question, it can be inferred that the halo effect is a much more complex phenomenon than it may seem from the first sight.

Although some researchers name halo as the most powerful source of information affecting the customer choice, it would be wrong to call it the only basis for evaluations. It is supported by evidence that at least two mental courses are always present when the choice takes place. The first one contains the most general information about the product or the brand whereas the second provides particular details about each of its characteristics (Wood, 2014).

Every consumer decides for himself/herself how much to draw from each of the information buckets to develop personal attitude and evaluation of the offered product. It is unquestionable that the halo effect exists for popular brands and may get reinforced during certain periods of time; however, it is still unclear which specific benefits produce the greatest impact, making the consumer neglect detailed attribute-specific information in favor of the brand name.

Thus, the aim of the literature review at hand is to provide a deeper insight into the issue in order to clarify the notion of the halo effect through analyzing different approaches to its definition, exploring its root causes, examining delusions it creates and giving recommendations that may help reduce it.

Literature Review

Definitions of the Halo Effect

It is commonly agreed that the halo effect is an automatic response of the consumer to the suggested product that leads to the reduced variance in the data by creating a persistent bias. Yet, despite the fact that most researchers have come to the consensus about the operational definition of the notion, there are several conceptual definitions that differ considerably in the proposed causes that lead to the emergence of the effect. All the definitions found in the topic literature may be categorized into three causal models: general impression, salient dimension, and inadequate discrimination halo effect.

General impression halo effect

Thorndike, who was the first researcher investigating systematic responses, noticed that in the majority of cases, raters are simply unable to assess different dimensions of one and the same object independently, which makes them rely on the overall impression as the key factor. As a result, their judgments are affected by global evaluations. The effect is called “general impression halo” since all aspects of the performance are consistent with the general effect produced initially (Gweon, Jun, Finger, & Rosé, 2017). This definition of the halo effect emphasizes the fact that it is aimed to simplify the process of selection by reducing the number of features under consideration.

Salient dimension halo effect

The second group of researchers categorizes the halo effect as the one attributed to the salient dimension, which implies that more dominant items produce an impact on the evaluation of less salient ones. A subtype of this is the associationist halo effect. The principle of its action is basically the same; yet, the sequence, in which rating is performed, is different: The rater initially gets primed by one aspect, which consequently influences the ratings of all others (Hino & Aoki, 2013).

Inadequate discrimination halo effect

Finally, the third group of scholars believes that the halo effect stems from the inability or unwillingness of the consumer to go into detail about this or that product. As a result, he/she fails to distinguish between the characteristics; this inability creates increased correlations (Wood, 2014). The response process, in this case, relies on assumed correlations instead of the information coming as a result of a thorough analysis.

Although the first two approaches to the interpretation of the halo effect seem the most well-grounded, it is rather challenging to identify what is so drastically different between them since the outcome that their name is quite the same–it consists of the inflated correlation among attributes of the item. Thus, it is questionable whether this distinction is needed for practical analysis of the consumer response to the halo effect.

There are scholars who believe that all the three models should not be considered as distinct since the characteristics of the halo effect that the stress can actually co-occur and overlap. The third model may serve as a pre-requisite for the first and the second since the customer’s unwillingness to differentiate between the characteristics and to analyze them separately from one another is the primary cause of relying on the general impression or salient items in order to make the proper choice.

Thus, it can be concluded that despite the differences of perspectives, most researchers agree that the halo effect can be interpreted as the inability or unwillingness of the rater to differentiate between numerous items, which leads to the reliance on the simplest choice strategy, disregarding objective metrics.

Root Causes of the Halo Effect

Although most studies on the topic name biasing and simplification as the major sources of the halo effect, the issue is in fact not that primitive. The unwillingness of the respondent to investigate the differences between the attributes not always comes from laziness. In fact, the problem is that a lot of modern business concepts (such as customer orientation, competencies, employee satisfaction, corporate culture, strategic planning, and others) are too broad and ambiguous to be precisely defined and fully comprehended.

As a result, the customer is at loss, which of these aspects is demonstrative of the company’s success. Thus, he/she opt to evaluate the most tangible aspect, which is the financial performance, while all other indicators are regarded as complementary. As a result of the created halo effect inputs and outcomes often get confused and the cause-effect relationships become chaotic.

That is why it is highly important for the company to be able to identify the root causes of the halo effect and eliminate them. Otherwise, the assessment of the performance will be contaminated, which will make the data invalid. Managers should try to look for independent evidence in order to compare, which attributes are the most influential and distort the perception of all the others.

There are two key sources of the halo effect.

Mental predisposition for the halo

As it has already been mentioned, the halo effect is created as a result of the customer’s desire to simplify categorization. For instance, opting for a branded offering instead of performing an in-depth analysis not only saves time and effort but also creates a delusion of the right choice. This is explained by the psychological assurance of the consumer that the product or brand familiarity, accessibility of information about it, its country of origin, and other attributes guarantee that the purchase is of the highest quality. As a result, the halo effect is created.

Benefit belief

This cause is closely connected with the previous one but the focus is shifted from the simplification strategy to the desire to obtain benefits. Customers tend to believe that opting for a particular product, company, or brand they will receive more than they spend. Although there is a lot of specific information provided about each product produced by the company or each item of the same brand, consumers tend to rely upon the most general information. In fact, this cause (although it is often listed separately) is the consequence of the previous one: generalizing the impression received from the item, it is easier to convince oneself in its advantages.

Delusions of the Halo Effect

While one group of scholars is particularly interested in the appearance of the halo effect in consumers and its consequences as per their ability to make a well-grounded choice, other researches take the company perspective in order to evaluate what threats it poses to businesses. They name several basic halo delusions that may potentially undermine organizational performance:

  • The delusion of causality. The halo effect produces a wrong impression that any two things that are correlated should be in cause-effect relationships. For example, if the company has a strong leader and demonstrates brilliant financial performance, it is typically believed that the former factor causes the latter (Rosenzweig, 2007). Although these two factors are unquestionably connected, it does not imply that the leader is the root cause of the company’s success. Excessive reliance on correlation instead of chasing causality may lead to the wrong priority attachment and performance failures (Chernev & Blair, 2015).
  • The delusion of the only possible explanation. It is a typical mistake committed by newcomers to the market: They often tend to believe that there exists a single explanation of why this or that organization has succeeded or failed. It is a strategic mistake to rely too heavily on one variable. The halo effect makes managers put too much emphasis on the single perceived driving force while neglecting other important constituents (Rosenzweig, 2014).
  • The delusion of finding the winning combination. It is typical for growing companies to analyze the performance of the industry leaders and identify what they have in common in order to borrow their practices. In this case, the halo effect impacts not an individual organization but the whole sector since less successful companies are excluded from the analysis (Hino & Aoki, 2013). Yet, it may be much more effective to analyze average performers or losers in order to find out what the key differences among them are.
  • The delusion of long-lasting productivity. There are a lot of companies that failed because of the halo effect promising lasting success. Good leaders must understand that even the industry leaders tend to regress over time and need to develop new strategies to stay afloat. As long as the organization relies on its previous achievements, its further development is threatened (Rosenzweig, 2007).
  • The delusion of the supreme performance. This is the result of the halo effect for companies dominating the market since they often forget that improvement and dominant positions do not guarantee long-lasting success (Rosenzweig, 2014). The point is that it is not enough to develop–the key factor is to develop faster than your competitors. Otherwise, the company will lose the market with the course of time even if it is not at the top of all customer ratings (Gweon et al., 2017).
  • The delusion of the right and the wrong end of the stick. Analyzing the business performance of the industry giants, other companies single out the key successful strategic moves that they implemented to achieve leading positions. The halo effect produced is that the strategy comes to be perceived as a universal sample for every other organization working in the same field (Gweon et al., 2017). Yet, it is quite clear that big stakes that huge companies make are not suitable for small enterprises. Furthermore, even the fact that their strategy is successful does not mean that there were no companies that failed using the same approach.
  • The delusion of organizational physics. Even the companies that seem to manage to resist the halo effect, actually fall their victims when their leaders suppose that both positive and negative performance outcomes are possible to predict with the accuracy of exact sciences. Contrary to the common understanding, business is far from being elegant, natural, and smooth. There is no step-by-step instruction that one must follow to make the business thrive. Despite all the efforts taken the ultimate results are still out of our control. The halo effect, in this case, is the belief in the certainty of the prescribed system that is in fact based on the game of probability (Madden et al., 2012).

Ways to Reduce the Halo Effect

Although numerous pieces of advice can be found in non-academic sources concerning the ways to reduce the halo effect, there are actually rather few methods proposed by scholars to companies that want to avoid the appearance of the effect in their surveys. All the approaches can be divided into design-oriented (those seeking to find and eliminate the causes of the effect) and statistical-oriented ones (applying various statistical methods to the information that has already been negatively affected by the halo):

  1. Statistical-oriented methods to deal with the halo. The methods strive to eliminate the effect of the general evaluation by computing partial correlation coefficients for every pair of attributes. These coefficients serve as input for the major analysis to follow and are aimed to reduce the number of attributes in subsequent investigations to be able to use the resulting factors as independent variables in multiple discriminate analysis (Sahoo, Krishnan, Duncan, & Callan, 2012). This technique can help remove both true and illusory halo from multi-attribute scales.
  2. Design-oriented methods to the elimination of the halo. In order to apply design-oriented methods, it is crucial to identify the major factor leading to the appearance of the halo. The respondent’s behavior can be affected by the method used or by contextual factors. Therefore, the halo effect may come as a result of both internal and external factors. As for the former, scholars usually name the willingness of the customer to maintain cognitive consistency, the influence of gender and education, and the positive perception of preferred brands. As far as external factors are concerned, they include the situational settings of the evaluation, the context of the rating procedure, and the scale used. If the cause of the halo is internal, it is almost impossible to remove or alter it. External causes are generally removed by increasing the degree of precision of the evaluation by transforming the settings (Sahoo et al., 2012).

Conclusion

The literature review of the halo effect has revealed that although the notion is typically used in order to describe the phenomenon of interpersonal relationships and prejudice that may appear due to the distorted perception, it is also widely applied in the world of business. The majority of influential companies and brands are influenced by the halo effect since this principle of evaluation is the most popular among consumers (regardless of the fact that several other factors are involved in the process of judgment).

The significance of the phenomenon is supported by the fact that it impacts both the customer decisions and the future success of the organization. The effect creates a number of delusions that every company has to overcome in order to avoid the detrimental effects of an oversimplification of the business processes.

References

Batra, R., Lenk, P. & Wedel, M. (2010). Brand extension strategy planning: Empirical estimation of brand-category personality fit and atypicality. Journal of Marketing Research, 47(2), 335-347.

Chernev, A., & Blair, S. (2015). Doing well by doing good: The benevolent halo of corporate social responsibility. Journal of Consumer Research, 41(6), 1412-1425.

Gweon, G., Jun, S., Finger, S., & Rosé, C. P. (2017). Towards effective group work assessment: even what you don’t see can bias you. International Journal of Technology and Design Education, 27(1), 165-180.

Hino, K., & Aoki, H. (2013). Romance of leadership and evaluation of organizational failure. Leadership & Organization Development Journal, 34(4), 365-377.

Madden, T. J., Roth, M. S., & Dillon, W. R. (2012). Global product quality and corporate social responsibility perceptions: A cross-national study of halo effects. Journal of International Marketing, 20(1), 42-57.

O’Donnell, E., & Schultz Jr, J. J. (2005). The halo effect in business risk audits: Can strategic risk assessment bias auditor judgment about accounting details? The Accounting Review, 80(3), 921-939.

Perera, L. C. R., & Chaminda, J. W. D. (2013). Corporate social responsibility and product evaluation: The moderating role of brand familiarity. Corporate Social Responsibility and Environmental Management, 20(4), 245-256.

Rosenzweig, P. (2007). Misunderstanding the nature of company performance: The halo effect and other business delusions. California Management Review, 49(4), 6-20.

Rosenzweig, P. (2014). The halo effect and the eight other business delusions that deceive managers. New York, NY: Simon and Schuster.

Sahoo, N., Krishnan, R., Duncan, G., & Callan, J. (2012). Research note—the halo effect in multicomponent ratings and its implications for recommender systems: The case of Yahoo! movies. Information Systems Research, 23(1), 231-246.

Sonnier, G. & Ainslie, A. (2011). Estimating the value of brand-image associations: The role of general and specific brand Image. Journal of Marketing Research, 48(3), 518-531.

Wood, T. J. (2014). Exploring the role of first impressions in rater-based assessments. Advances in Health Sciences Education, 19(3), 409-427.