First off, I feel the need to warn my buddy Paul, that this has nothing to do with the X-box video game series (Paul has informed me that I need to write about stuff he cares about, read video games, in order for me to get any readership). I will however be posting on game theory soon, and maybe there is something he can get out of that, though I’m not sure how applicable it is to World of Warcraft.

On to the good stuff… Phil Rosenzweig has presented an excellent book that is full of great insights as well as clear writing. It should be required reading before reading any “Secret to Success” book. For those of you unfamiliar with the “halo effect”, Wikipedia defines it as a cognitive bias whereby the perception of a particular trait is influenced by the perception of the former traits in a sequence of interpretations.

What does that mean in the context of business and the “Secret to Success” books? First, one has to be very careful about measuring items that are colored by the overall success of the company. There are several cognitive biases and mathematical distortions that tie in here including survivorship bias (the tendency to only judge those that have survived or have had great success, not all entities with a particular trait), confusion between causation and correlation, ignoring other factors causing a result.

One of the things that I like about this book is that it acknowledges that a business or manager can do all the “right” things and still fail. One shouldn’t judge the value of a manager strictly by results, as many people can take risks that don’t pan out, but were thoroughly executed, or avoid risks and execute well, and still not have the results of someone who took risks and executed in a so-so fashion.

I like to make the poker analogy here of making the right play. You make the strategically correct decision given imperfect knowledge, and execute accordingly. You are not guaranteed success, the percentages may be in your favor but only marginally. In fact, its quite likely that you do everything correctly, and incur multiple economic failures. Does this mean that you made the wrong decision? No, you made the right decision given your knowledge, perhaps you should have picked up more knowledge (read the glint in Scott’s eyes), but at the end of the day Tom just ends up getting a miracle card.

The questions are: How well can you determine your percentage chances? How do you put a value on your reward? What are the implied odds of a given decision? This is where business (and life for that matter) has a true sense of randomness that far outstrips that of poker. We know what the odds are of success in any given scenario during a poker game (card odds) and the risk/reward (pot odds – the ratio of a specific bet to the total won by that bet). We can use this to judge how a rational person should act (Bob that means fold next time). Of course one of the great things about the economy as opposed to poker is that it is not a zero sum game. On the other hand, poker gives many opportunities for success, as opposed to business, where you won’t know the outcome for a great deal of time, in which you would have expended an incredible amount of effort.

Phil Rosenzweig’s Site

The Halo Effect at Amazon