The Halo Effect: How it leads investors astray

Jason Zweig with an excellent column on how the halo effect can lead investors astray:

But halos also can lead investors astray. As management professor Phil Rosenzweig points out in his book “The Halo Effect,” a soaring stock price can lead investors to regard the company's managers as focused, disciplined and passionate—while, in the negative halo of a falling stock price, the same executives will now seem stubborn, unimaginative and resistant to change.

Investors think, at either time, that they are evaluating the stock and the managers independently, but one opinion inevitably colors the other, often leading investors to be too bullish on the upside and too bearish on the downside. The managers haven't changed; our perceptions of them have.

Just think of Cisco Systems' chief executive, John Chambers, whom a major business magazine once called “the world's best CEO” shortly after Cisco became the world's largest stock by market capitalization. Have Mr. Chambers's skills faded, or has the fall in the stock simply changed how investors see him?

If you want to make better decisions, I recommend reading Judgment in Managerial Decision Making, The Halo Effect, and Daniel Kahneman's new book Thinking, Fast and Slow.