What is the halo effect and horn effect? It’s when you allow one good trait (halo) or one bad trait (horn) to influence your judgement on about related persons, services, products, etc.
The halo/horn effect can be applied across different contexts. Here’s a simple example of the halo/horn effect: We like someone so we think they’re smart, or we don’t like someone so we think they’re less competent. Of course, likeability is not a proxy for competence.
Halo and horn effects can cloud financial decision making. For example, you may have lost money in the stock marketStock market The collection of markets and exchanges where stocks, bonds and other securities are issued or traded.+ read full definition a decade ago and will not investInvest To use money for the purpose of making more money by making an investment. Often involves risk.+ read full definition based on a bad experience despite evidence that the market has risen steadily over time. Or, you may think of buying a financial product or service because of a clever or slick marketing campaign. You may even expect a higher return or level of service based on that impression.
Either way, halos and horns can harm our investing decision-making and lead us to ignore important information.
Overcome the halo/horn effect
Ask yourself these questions:
- Do I have concrete evidence of performance? If not, do your research and ask for professional advice if needed.
- Am I relying on just one data point to form an opinion? If so, think about doing more research and test if your first opinion was the right one.
- Am I basing my judgement on a first impression? If so, consider a second look.