The Halo Effect: Why Growth Makes Bad Decisions Look Smart

A referral channel finally catches. Or a big storm makes landfall after two quiet seasons, and the phones don't stop for months. Files come in faster than the team can open them, revenue climbs, and the owner keeps meaning to write down how files actually get worked here. Then onboarding, file review, and intake each wait their turn, because the phones always win. Across the public adjusting firms and first-party law firms I've worked with, this is the most common way a good year turns into a hard one later. The numbers say everything is fine, so nothing gets built. That's the halo effect in business: a good result vouching for everything behind it, and growth produces the brightest halo there is.

This is article two of a seven-part series pairing each phase of the 7Seas of Entrepreneurship with the cognitive bias that shows up there most often. Last article covered the spotlight effect. This week is the phase every owner wishes they were in.

The Soaring Sea Feels Like Proof

The Soaring Sea is the growth phase. Demand outruns capacity, momentum feels almost effortless, and the owner's hours rise right along with the income. Two things carry the load here: the capacity to sustain a heavy pace, and an honest answer to how much is enough. In 7Seas terms, those are Perseverance and Prosperity, the mainsail. Two other things need adjusting constantly as volume climbs: the systems that turn effort into finished work, and the measures that tell you whether that work is any good. Those are Process and Progress, the headsail.

The framework names the mistake that keeps owners stuck in this Sea, and it's blunt: treating systems as something to build later. Soaring ends badly when Process and Progress go untrimmed. The owner looks like they're soaring from the outside and feels like they're drowning on the inside, excellent at the work, producing real results, and with no structure underneath any of it.

What the Research Says About the Halo Effect in Business

Psychologist Edward Thorndike named the halo effect in 1920. He was studying how military officers rated their soldiers on separate qualities such as intelligence, leadership, and physique, and he found the ratings moved together far more than they should have. A soldier rated high on one quality tended to get rated high on all of them. One general impression bled into every specific judgment.

Phil Rosenzweig, a professor at IMD in Switzerland, carried the idea into business in his 2007 book The Halo Effect and a McKinsey Quarterly article the same year. His best-known example is Cisco. In the late 1990s, observers praised its strategy, its handling of acquisitions, and its focus on customers. After the dot-com bust, many of the same observers called the strategy flawed and the acquisitions haphazard. Cisco itself hadn't changed much. Its results had. Rosenzweig's summary is the useful part for any owner: outcomes get mistaken for inputs. When the results are good, we assume the decisions behind them were good, and we stop looking.

Growth Vouches for Decisions Nobody Made

In a growing firm, plenty of things were never decided at all. They just happened, and the revenue made them look like a plan. The halo doesn't only flatter good decisions. It hands credit to the absence of one.

Here's the order in which I see systems get pushed to later, from most to least common:

• How files are worked. The method lives in the owner's head and in the habits of the two people who've been there longest.

• Onboarding. New hires learn by shadowing whoever has a free minute, which during a surge is nobody.

• File review. The owner reviews files at night, or not at all, and calls it oversight.

• Intake. One person carries it, and it works because she's good, not because it's built.

• Compensation plans. Each one was set at the moment of the hire, so no two match and nobody can explain why.

None of that shows up as a problem while the volume is high. Files close, checks arrive, and the busy season is its own evidence that the firm runs well. The cost lands later, and it lands on exactly the parts the halo was covering. A firm that never wrote down how files get worked can't train new people fast enough to keep up with the growth it already has. It also can't hold quality steady, which is why longtime clients are often the first to notice the experience changed. The headsail went untrimmed exactly when volume was changing what it needed to be. The same holds outside claims work. Any professional services firm that grows on referrals runs on the same borrowed confidence.

When the Growth Stops, the Halo Flips

The halo runs in reverse, too, and that changes what you should watch for. The 7Seas framework lists the signals that Soaring is ending, and they tend to arrive in order: growth flattens while effort stays high, quality complaints appear, and every decision waits on the owner. All three were building under the halo the whole time.

The system I see break first when growth slows is the one most owners never thought of as a system: marketing and sales. While the referral channel ran hot and the storm kept the phones busy, inbound leads did the selling. Nobody had to go find work, so nobody built a way to. When the inbound slows, the firm has no process to go hunt for more business, and the owner is starting cold at the worst possible time.

Then the halo flips. The owner looks back at the busy years and decides every call made then was wrong, the same way observers turned on Cisco. That's how a firm misreads the Stalling Sea and starts tearing out things that worked. The decisions weren't all good during the boom, and they aren't all bad now. The halo just stopped shining on them.

What a Firm Growing Without the Halo Looks Like

In a firm that grows without the halo, the owner can tell which results came from a system and which came from heroics. The way files get worked is written down well enough that a new hire can follow it. Onboarding runs the same on a slow Tuesday as in the middle of a storm surge. File review happens on a schedule rather than at midnight. Somebody owns finding new business even while the phones are ringing, so a slower quarter is a change of pace rather than an emergency. And growth gets measured by whether it holds up, not only by how fast it came in.

Seeing the Halo Is Free. Building Under It Is the Work.

Knowing about the halo effect won't make the phones stop ringing long enough to build anything. Getting the systems in place while the volume is high, before a slowdown builds them for you the hard way, is what we cover in Below the Waterline, TAA's online course for owners who want the foundation under their growth to hold. If your best year so far is also the year nothing got written down, start there.

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