Sunday, August 5, 2012

The Halo Effect: Delusion #8

Nassim Taleb calls it "One of the most important management books of all time." The Halo Effect tells us why much of what we believe about business is quite likely false, thanks to a number of delusions. Author Phil Rosenzweig doesn't mince words as he attacks a number of the most popular business books of all time for failing to account for simple and foreseeable errors in drawing their conclusions.

Delusion #8: The Wrong End of the Stick

Focused companies are often given credit for succeess, while their more diversified peers are derided for being unfocused. It's not clear that "focused" companies rank among the most successful whereas diversified companies don't, but even if it were the case, this does not constitute evidence that focus is a key to success.

If focused companies are more proportionately found among the most successful companies, it stands to reason that they might also be proportionately found among the failures. This is akin to finding that the most successful gamblers at the race track on a given day are those that concentrated on certain long shots. Unfortunately, this hardly qualifies as a prudent strategy on that basis alone, as the least successful gamblers were likely those who did the same but whose long shots did not pay off.

Once again, Rosenzweig rips into Jim Collins' popular book Good to Great for not having understood this point. Collins recommends focus, since his successful group outperformed his diversified group, but does not appear to recognize that failures were likely also more focused, just in an area that was fruitless.

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