What’s The Halo Effect?

The Halo effect is a thinking mistake. We use experience with a person, an institution, or an idea, to guide our behaviour. There is considerable evidence that we do take a good experience or feeling about an organization and assume other things they do will also be worthy.

How it can harm

Be cautious with older NGOs and governmental departments and agencies. There was a time when The Center for Disease Control (CDC) was supreme. Today there are people who would not believe them if they said the sky is blue on a clear day. The reason is the overstepped their reasonable bounds. They have overlapped the disparate fields of science and politics. That happens when the scientists rely on government for money and try to expand their mandate.

We believe them for a while because of the halo effect, but that wears off.

Once they lose credibility, we will mistrust everything they say and do because the Halo Effect works both ways.  Things that have shown themselves to be unreliable have great difficulty overcoming that stigma.

It takes 20 years to build a reputation and five minutes to ruin it. If you think about that you’ll do things differently.” Warren Buffett

The sad reality is we lose a perfectly functional agency because the Halo Effects is now negatively aligned.

The Halo Effect works while its context remains unchanged.

How it Affects Decision Making

We all know the idea of impulse buy. Most of what drives that is a confluence of various halo effects. You see a computer program, or a sweater, or a steak. What happens? The item in front of you is immediately contextualized  Advertising, problems you think it will solve, good feelings from other similar things, a colour, a friendly provider, and a dozen more. It is difficult to be objective in that situation. The only limit is price and ability to pay it. In the moment

If there was a rule that said you must wait 30 minutes, many impulse decisions would never be made.

A sweater you don’t wear is not a crucial factor in life, but some others are. Other decisions are more life-changing and made in thempulse mindset.

Fundamental decisions require more effort.

How many decisions in life matter much? Surprisingly few. Decisions you can reverse, say by donating the sweater to the Salvation Army store, are essentially riskless. But there are others.

You attend a seminar and decide starting your own business is a terrific idea. The evening after the seminar there is a high probability you should do it. What if you wait two weeks to decide? The probability will be much lower that you will leave your job and spend your savings. The Halo Effect fades in the face of objective reality.

Many years ago an executive at a large employer in my community came to my office to discuss leaving his highly paid, secure job to start a business. The reason he mentioned first, and I took to be the chief motivator, was “I have noticed that most of the low handicap golfers at the club own their own business. I’d like the time to improve my game.” It is hard to know how to respond.

I gave him a template for creating a business plan and asked him to come back when he had completed it and to call if he needed help. The idea was that once he gathered information the risk-reward calculus would be clearer. He abandoned the idea within a week.

Other key decisions include:

  • Choosing a life partner
  • Having a child
  • Choosing a career
  • Choosing a country or city to live.
  • Investing style

Making better decisions

Some decisions need a period of sober second thought. Bringing a partner into a business or a person into your life should have an engagement period. The time together provides more information and may alter the shape of the relationship or even cause the interim arrangement to end.

Build flexibility and options. Options are  how you provide for minimizing unforeseen adverse effects. Options are alternate choices. Build or buy. own or lease. advertise one way or another. You will know far more in the future so take advantage by not making too many hard and fast decisions in the early going.

The old idea of “sleep on it” is a good one. As the stakes go up, it will take more sleeps to be comfortable with the decision.

You’ve heard of “Make haste; make waste” Decisions are especially good at proving that axiom.

The takeaway

How many of your impulse decisions have turned out well?

When you sense an impulse, it is usually because of some externally imposed halo effect. It will pay to make the decision without that effect. Gather more information and assess your life purposes.

Don’t be in a hurry to give up what you have for an unproven future. Learn to control with options.

Be sure the opportunity fits your life plan.

It is madness to risk losing what you need in pursuing what you simply desire” Warren Buffett

Have a general vision of your life plan and spread it out on a timeline.

Timelines are the arch-enemy of impulse.

I help people have more retirement income and larger, more liquid estates.

Call in Canada 705-927-4770, or email don@moneyfyi.com

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