Do not judge a book by its cover” is a well-spread message but, out-ward looks and impressions still impact our decisions effectively. We do not need an expert to decipher this for us once we become aware of the judgemental errors caused by the halo effect.
We are aware that we are opinionated and judgemental by nature. What we also know is that the effect of a halo is unreal, stemming from our imaginative, dramatic selves (halo: a glowing ring above the heads of saintly beings, lighting up their faces and making them look like the chosen ones).
Simply put, our opinions and judgements from past experiences skew our thought process and decisions permanently until we are challenged by another empirical evidence, which then encourages us to question our beliefs.
So, what role does the Halo effect play anyway?
It is a cognitive bias in which our overall impression of a person (usually popular) influences our opinion of their message.
Origin of The Halo effect
Edward Thorndike, a Psychologist whose commendable works became a starting point for many other researchers and scholarly men to carry his work forward, especially in educational psychology, published a paper called A constant error in psychological ratings.
In that, he explained, “It appeared that the estimates of the same man in a number of different traits such as intelligence, industry, technical skill, reliability, etc., were very highly correlated and very evenly correlated. It consequently appeared probable that those giving the ratings were unable to analyze out these different aspects of the person’s nature and achievement and rate each in the independence of the others. Their ratings were apparently affected by a marked tendency to think of the person in general as rather good or rather inferior and to colour the judgments of the qualities by this general feeling”.
Sounds familiar? Well, there is more.
Some of the instances where the Halo effect influences our decisions are:
• We invest in a business because we like the brand ambassador and her ad campaigns. This is purely based on our likability towards influencers and the overall reputation they have in the industry.
We all love the Kardashians and, we tend to believe in everything they endorse. Of course, they do their due diligence before endorsing a product/service but, we must ask ourselves this: ‘Is this a suitable purchase/investment for our portfolio?’ More importantly, did we do our due diligence on understanding the business, like the growth and earnings forecast, their unique selling point (USP), competitors in the industry, business motive, etc.?
• We entrust all our assets with a Portfolio Manager or Wealth manager because we think she is nice and genuine in how they conduct themselves on the news media while representing their firm.
What do we know about this person when it comes to identifying opportunities based on our risk appetite, investment beliefs, willingness to invest in exotic financial instruments, etc.?
• We open an account with a new boutique firm because we know someone who has joined there and think of a great deal about this person’s capabilities.
Do we stop to think that his capabilities alone do not define the future success of their business and the whole firm?
A person need not be the centre of the Halo effect, always.
It could be a well-known brand as well. It is more common in markets because we often believe that all kinds of product and services under a popular-brand umbrella will be of supreme quality. In reality, there could be only one or two products that majorly contribute to their revenue. But we end up buying almost all or most of their products because of loyalty to the brand.
These decisions turn out to be biased and impulsive, due to our lethargy to do research; at times disastrous too. Biases do not cause loss to our portfolios all the time. Identifying biases, however, must be the first step towards rigging things in our favour, while most of them seek such shortcuts.
When we follow the herd mentality and place bets on someone blindly because they are attractive or seem nice or look well-educated, we are investing money on the person than the underlying business idea for what it is.
The opposite is true too.
Just like how we picture Angels with a Halo, we are accustomed to imagining the Satans with horns. Funny as it may sound, the opposite of the Halo effect is the Horn effect.
The Horn effect is another where we attribute all the bad qualities to a person based on one bad experience we have had or, mostly, heard. In the finance and business industries, we often remember a firm for its bad phase and are hesitant to invest in them again, even if they are reviving well and are showing growth potential.
Why does that happen?
One lawsuit becomes inscribed in our memory strongly and, we will always associate the firm with it, regardless of all the changes that happened later, for good. This is nothing but the horn effect. A simple human mindset when it comes to not liking a person for something that happened years ago has converged into a behavioural pattern that influences some of our important decisions. In turn, we end up losing out on promising investment opportunities that are rather cheap to buy.
How do we overcome this?
The halo and horn effects are deeply routed, from partiality and favouritism. We are not humans without them, behaviour. And when emotions take over, intelligence does not always get on board with it.
So, the first set is to ‘identify’ that we like something or someone. The next step is to reason out ‘Why?’. Now try and match if those attributes we find appealing are good enough to place all our bets. More often than not, we will find ourselves a victim to this bias and, with practice, avoid giving in to this outcome.
Isn’t this apprehension a kick-start towards ensuring better use of your cognitive assets and a path towards building an efficient mental model?