halo effect

⚽ Its heading into the business end of the football season, when champions are crowned, and dreams can turn into nightmares.

At the bottom, we are rapidly approaching last chance saloon for some clubs, as some seek to change manager (and fortune) in order to capture the “new manager bounce”.

This phenomenon refers to a team changing their manager and experiencing a sudden surge in results that can be directly attributed to the new circumstances. This uptick is often attributed to a renewed sense of motivation, tactics and sometimes the atmosphere around the club brought by a change in leadership.

There are a couple of things going on here that we can unpick. Firstly, you only ever hear of “new manager bounce” either before the appointment or when it goes well. When it goes to plan and results improve, there is some ‘confirmation bias’ at play. Confirmation bias happens when observers (pundits), selectively notice and remember the instance when their predictions have worked out. Easy to say “the new manager has gone in and got results, like we predicted”. How many times do you hear commentators reference “the new manager bounce hasn’t really played out…”

On a deeper level, when a new manager goes into a dressing room, there is a chance that results can pick up due to two factors;

1. Reversion to the mean (we will come back to this in future)
2. The “halo effect”

😇 The “halo effect” is the tendency to perceive a team positively in one aspect, which then influences perceptions in other areas. For example, if a team wins a few games after a manager takes over, observers may account that positively due to skill, leadership or improved discipline. We have seen this many times before. However, those qualities might not necessarily be the main driver which will lead to an enhanced reputation of how events unfolded.

How do we find the “halo effect” in the investment industry?

There are two obvious ways this manifests itself. Firstly, the third-party fund manager industry loves to create heroes out of fund managers. Think back to the likes of Peter Lynch running Magellan and more recently someone like Neil Woodford here in the UK. These guys were no doubt skilled but attracted assets based on past performance. This can lead investors to overlook or underestimate the risks involved and/or weaknesses in their processes. Secondly, the media coverage of certain stocks/industries can create the effect causing investors to overlook the potential risks involved. Think about how the media covered technology stocks during the “dot-com” boom and cryptocurrencies more recently.

In each case, the “halo effect” ultimately leads to decisions being made on perceptions rather than thorough analysis, potentially resulting in sub-optimal outcomes.

So as we enter the final innings of the season, look out for the “new manager bounce” and make note of its impact. How much is due to the “halo effect?”