Literature Review on "Halo Effect in Business Halo Effect Literature"

Literature Review 16 pages (5281 words) Sources: 16

[EXCERPT] . . . .

Halo Effect in Business

Halo Effect Literature Review

The existence of the halo effect has been recognized for many years since 1920 when Edward Thorndike was the first psychologists to research the halo effect. This was then followed by other researchers who studied the halo effect in relation to the attractiveness of the person or organization and led to its application in various sectors such as business, education and judicial systems. The researchers stated that the halo effect was greatly influenced by the first impression on a person or organization Luttin, 2012.

The halo effect has a very powerful influence on business. This literature review attempts to find the halo effect in business and how it affects decisions made by the public on the company or organization. It also looks at how the halo effect affects decisions made by the company employees and the management team regarding the company and how they need to understand the halo effect in order to make better informed decisions.

Definition of the halo effect

Thorndike (1920)

was the first to define the halo effect is a deviation in the judgment of the character of a person or organization which is influenced by the overall impression of the person or organization. Over the years, new definitions of halo effect have developed from the widespread research that has been conducted in this field. In the literature that was reviewed, several conceptual definitions of the halo effect arise. Though these definitions are conceptually different, there is a general consensus that the halo effect is a bias caused by a correlation of one item in a scale above the normal levels thus leading to a reduced variance in the other items Murphy, Jako, & Anhalt, 1993.

Tiffin and McCormick (1965)

define the halo effect as the domination of all other attributes or traits by one particular one.

Fisicaro and Lance (1990)

attempted to categorize the different definitions of the halo effect that exist. Their first category was the general impression halo effect which encompassed the definition of Thorndike (1920)

and Nisbett and Wilson (1977)

of halo effect as a bias of the general impression that leads to performance ratings being consistent with the person's general impression. The second category was the salient dimension halo effect. These definitions defined halo effect as the evaluation of less important items based on the evaluation of other more dominant items

ADDIN EN.CITE

(Cooper, 1981; Fisicaro & Lance, 1990; Kozlowski, Kirsch, & Chao, 1986)

. The last category is the inadequate discrimination halo effect. This is the definition of halo effect as the unwillingness or inability of a person to distinguish among the attributes or traits that are evaluated which creates a cross effect of the attributes on the same scale thus resulting in increased correlations Balzer & Sulsky, 1992(; Banks & Murphy, 1985)

In all definitions of the halo effect the outcome is that there is improper representation of the true situation as a result of an inability or willingness of the respondent to differentiate several items on a single scale Wirtz, 2003.

It, therefore, emerged that this it was difficult to differentiate among the categories of definitions as a result of their identical outcome. Lack of differentiation of the items on the scale is the origin of the halo effect. The respondent may be unable to recognize the difference as result of their experience or knowledge or they may be unwilling as a result of lack of motivation, fatigue or boredom Tourangeau, Couper, & Conrad, 2004()

Methods

This literature review concentrates on peer-reviewed books, articles and journals on the issues surrounding halo effects in business. It is organized thematically according to the various areas where the halo effect is felt in business.

Current situation

Role of attractiveness

Research shows that those organizations which have favorable traits such as huge profits, good corporate social responsibility, and low employee turnover are generally liked better. The attractiveness of a company or organization has been found to influence its overall likeability. For companies that are known to regularly downsize and lay off their workers, the public generally makes decisions that the company is unattractive based on these staffing decisions being unlikeable. However, the situation in the real world may be different since these companies may be downsizing in order to reduce their staffing expenditure thus greatly improving their profitability. The decisions that are made as a result of the halo effect do not take into consideration the real situation at hand which means they give an inaccurate representation of the company or organization.

Companies and organization have learnt to use the halo effect for their own advantage by ensuring their marketing and advertising activities are targeted towards portraying a good image of the company in order to influence the bias of the public towards the company. A good example is the Coca-Cola Company. In June of the year 1999, the company's products made about 30 children ill in Belgium. A similar incident happened in Poland where 100 people feel sick from Coca-Cola products. The company responded by running marketing campaigns to regain consumer confidence in their products which helped the company recover from the situation Mayhew & Murphy, 2009()

Much of how people think about a company is greatly affected by the halo effect. When a company is involved in corporate social responsibility activities as well as experiencing rapid growth, people tend to have a positive judgment of the company. The same goes for companies that have brilliant strategies, a vibrant culture, motivated employees as well as a visionary management team. Researchers have found that the halo effect contaminates the decision of consumers on the company which creates a huge flaw in the market forces since the competitive positioning of products is affected significantly by the halo effect.

Leuthesser, Chiranjeev, and Katrin (1995)

posit that marketing researchers have learnt to use the overall attitude of a person towards a product as the primary influence of a multi-attribute rating model used for product evaluation. Marketers have used this to create competitive positioning of their products. This has been noted to lead to distortion of the consumer's judgment about a product Sahoo, Krishnan, Duncan, & Callan, 2012()

Brand equity and the halo effect

Arguments brought forth by Leuthesser et al. (1995)

posit that brand equity has more in common with the halo effect. Brand equity is the value of a product to the consumer which makes them opt for the product rather than choose an identical product with a different brand name. This is essentially the contribution of the brand name alone to the value of the product to the consumer. The researchers state that marketers need to understand the halo effect and how to measure it O'Donnell & Schultz, 2005()

Despite marketers creating multi-attribute rating systems for evaluating the products, the consumers often avoid actively processing such information. Therefore the overall affective impression of a product plays a role in influencing their choice of product. Though this cognitive misery for consumers is important in influencing their purchase decision, brand managers still need to make informed decisions about the product positioning, competitive differential and repositioning Park, Park, & Dubinsky, 2011()

The result of their study highlighted the problem faced by marketers in categories of products which have very low differentiation. Companies may need to spend huge chunks of money to create brand awareness and ensure consistent brand association. However, slight perceived differences may considerably influence the choice of consumers. The researchers argue that by measuring the halo effect, the marketers can minimize the influence of other factors in order to ensuring consumer decisions are driven by enduring brand impressions rather than the halo-like effects. Measuring the halo effect is useful in measuring the indicators of brand equity when this is used together with the overall brand ratings. A strong halo effect suggests that the brand is seriously deficient and therefore managers of brands should measure brand equity should be measured using the halo measure which shows objective measures of the choice of consumers Sahoo et al., 2012()

Beckwith, Kassarjian, and Lehmann (1978)

found that the consumers rating of a brand are set on a set of attributes or traits such as the company image, brand recognition and corporate social responsibility. The popularity of a particular brand plays a major role in influencing the decision of a consumer to choose the brand over another similar brand. This represents an unfavorable bias that the consumer has over other less popular products. Other attributes that influence the degree of the halo include the relative importance of the product over other products. The amount of corporate social responsibility that the company maintains also helps to increase the bias of consumers over their products. Consumers are generally more likely to purchase products or services of companies that have high levels of corporate social responsibility thus bringing a halo effect to the consumer's decision on the product or service.

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