The Halo Effect
Investing is full of biases. In fact, in our everyday life, most of our decisions are full of them. One shouldn’t be judged for those biases, since most of them are rooted in our evolution. I once had the privilege of asking Rolf Dobelli (the celebrated Swiss author, who wrote ‘The Art of Thinking Clearly’, a great book to know more about our biases), on what’s the way to remove these biases. He said we mostly can’t, being aware of them is itself a reasonable achievement. The Halo Effect is one of my ‘favourite’ biases of them all.
What’s halo effect?
The halo effect is a cognitive bias that claims that positive impressions of people, brands, and products in one area positively influence our feelings in another area. We see examples of it in our everyday life. . You can learn about it in greater detail here: The Halo Effect. It does resonate with one of our earlier blog posts:
My favourite Halo Effect example
During my school days, till my class 6th-7th, I was a pretty average student. Suddenly in class 8th, I started getting pretty decent grades in maths and science ( my forced humility is acting as a constraint here 🙂 ). Suddenly my class teacher put in the school choir (I went to a convent school). Only people who had the privilege of listening my singing, would know why this is clearly an example of halo effect :-). If you haven’t had that privilege, you are a blessed soul.
Fund Managers who speak well
In the investing world, the obsession with a particular fund manager or a fund house stems from the halo effect. It’s important to evaluate opportunities dispassionately and not get unduly swayed by the commentary. Often fund managers who speak well get ‘Rockstar’ status. Needless to say, oratory has no role to play in a fund’s performance. In fact, some of the best fund managers aren’t the most articulate ones.
Copying an ‘Intelligent’ friend
Another relevant example is how we often lean on our ‘intelligent’ friends for investment advice. If she is from one of those Top Tier B Schools or a finance pro (not on the investing side though) and investing into something, we don’t mind copying her. It’s one thing being great in your chosen domain and it’s completely different being good at investments. Moreover, she and you might be completely different personalities when it comes to investing.
Stories are great, not necessarily in investing though
Another extension of this is the ‘storifying’ culture. Storytelling is greatly used to ‘sell’ investing ideas. Beware of a great story. Stories don’t equal great returns. It build a halo around an investing idea. They often lure us in making bad investment decisions. In any other form of marketing, I am an admirer of the art form
So never lose your objectivity and develop love for simplicity and boring :-). Happy investing
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