Critical Thinking, Halo Effect and Managerial Decision-Making


By

Jayanta K Mohapatra
Asst. Professor & Area Chair
Business Policy Area (MBA Programme)
Indore Management Institute & Research Centre
Indore
 


Attaining high market share, sustaining superior market position and achieving market leadership, building a vibrant brand name is the fundamental question near every corporate executive. Intense market competition, rapid technological change makes it even more difficult. Managers are always in search of ready to implement formulas to achieve sustained competitive advantage.

In the search of a reliable path, managers tend to follow the books and articles and also practices of other companies to find out a ready to use formula for high growth or performance. Though the research outputs are based on extensive data and outcomes of rigorous analysis, many of them are flawed and are based on questionable data and lead to erroneous conclusions. 

I came across the article by Phil Rosenzweig "The halo effect, and other managerial delusions" in last Mc Kinsey Quarterly (Feb. 07) on the same front and wish to share my views on that.

Our business world is full of research and analysis. So many management thinkers come up with ideas, suggestions, conclusions which are also being published in celebrated business magazines. Many of the research reports bring in newer models, guidelines, tool kits for improvement of market share or superior growth. But the business world is not a place of clear causal relationships, where a given set of actions leads to predictable results, but one that is more tenuous and uncertain.

Many managers in quest of performance follow these models with cautious and care. Strictly follow the guidelines prescribed. Often the result is unsatisfactory of course success may be tested by a few.  A part of the problem might be because of the problems of the bottom line or lack of proper motivation or lack of resources in terms of finance and HR and so on… but there is chance and to a larger extent that the model it self is not free from the HALO effect.

What is vital to decision making is the role of critical thinking. Clarity in thought, a more realistic understanding of business success and failure is imperative.

The halo effect was first identified by US psychologist Edward Thorndike in 1920, which describes the inclination to make specific inferences on the basis of a general intuition.

When a company that is performing well, with mounting sales, lofty profits, and escalating stock price, the leaning comes is that the company has a sound strategy, a visionary leader, highly motivated employees, a first-rate customer orientation, a energetic culture, and so on. But when that same company suffers a turn down, many people immediately conclude that the company's strategy is stagnant, its people became complacent, it neglected its customers and more. In fact, these things may not have changed much, if at all.

Last month I found an article titled Developing Advanced Decision-Making Skills in International Leaders and Managers by Asila Safi and Darrell Norman Burrell in Vikalpa, which has focused on the role of critical thinking in decision making.

"On the surface, most people assume that the decisions made by intelligent and educated people include critical thinking. In the context of discussion, the activity is more complex."

Critical thinking can be seen as a conscious and deliberate process which is used to interpret or evaluate information and experiences with a set of reflective attitudes and abilities that guide thoughtful beliefs and actions (Mertes, 1991).

Managers should look for independent evidence. Merely accepting the idea that a successful company has good strategy or that a declining company must have a poor strategy or execution will lead to serious flaws in decision making and there will be circular logic.

Many studies of business performance rely on data polluted by the halo effect. Though they are based on vast amount of data but often overlook to the fact that if the data aren't valid, it really doesn't matter how sophisticated the analysis appears to be.

Some recent books are unambiguous on this point. They provide certain formula and claim that these will bring great performance or some thing that will surely destroy the companies. I came across an article basically an edited version of the article published in July 2007 issue of the Indian Management, "Good companies destroy themselves by acquiring bad habits" which is a snap sort of the book the "Self Destructive Habits of Good Companies" or Stephen Covey's Seven Habits of Highly Effective People. Business managers try to imbibe these things but still it becomes tough most of the time.

Following a given method can't ensure high performance. In a competitive market performance is fundamentally relative, not absolute. Success and failure depend not only on a company's actions but also on those of its rivals. A company can improve its operations in many ways—better quality, lower cost, faster throughput time, superior asset management, and more—but if rivals improve at a faster rate, its performance may suffer (Rosenzweig).

Many times these studies rely on sources of data collected from retrospective interviews, articles from the business press, and business school case studies, which are many times contaminated by the halo effect.

Strategic decision making is different from administrative management. There is no assured or definite path to success. A company's performance as a relative term depends on a number of factors external and internal. A company is a network of relationships and operates in a highly competitive and uncertain environment.

The true managerial effectiveness should not rest on a given formula or set of pre defined steps Managerial critical thinking is about learning to apply experience-based, team-based, and formal problem solving methods to situations. It is crucial to develop a devoted ability to overcome and become self-aware of biases, false assumptions, myths, and faulty paradigms that can impede useful and effective decision-making. So good managers needs to gather appropriate information, evaluate it thoughtfully, and make choices that provide the best chance for the company to succeed, all the while recognizing the fundamental nature of business uncertainty.

I expect to get feed backs from you that will help improve our understanding on decision making and the quality of our research papers and methodological issues. I can be reached at jayant@consultant.com.

References

    1. Diestler, Sherry (2004). Becoming a Critical Thinker: A User Friendly Manual, New York: Prentice Hall.

    2. "Developing advanced decision-Making skills in international Leaders and managers"; Asila Safi and Darrell Norman Burrell; Vikalpa; volume 32;  no 3; July - September 2007

    3.  "Good companies destroy themselves by acquiring bad habits" Pp.36 Indian Management Vol.46 issue12, December 2007.

    4. Hammond, John S; Keeney, Ralph L and Raiffa, Howard (2006). "The Hidden Traps in Decision," Harvard Business Review, 84(1), 118-126.

    5. Mankins, Michael C and Steele, Richard (2006). "Stop Making Plans and Start Making Decision," Harvard Business Review, 84(1), 76-84.

    6. "The halo effect, and other managerial delusions" ; Phil Rosenzweig February 2007, The McKinsey Quarterly
     


Jayanta K Mohapatra
Asst. Professor & Area Chair
Business Policy Area (MBA Programme)
Indore Management Institute & Research Centre
Indore
 

Source: E-mail December 23, 2007

          

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