An article by JASON ZWEIG
"
In both cases, what psychologists have christened the "halo effect" was at work. In this quirk of the human mind, one powerful impression spills over onto our other judgments of a situation. The effect was first documented in the U.S. Army decades ago, when soldiers who earned high scores from commanders for one quality (such as neatness) also got high marks for entirely unrelated qualities (such as loyalty and physical strength).
Halos can be cast by many aspects of a company. Consumers who know a firm is highly profitable are more likely to believe its products are high-quality and its advertising honest. That helps build loyalty among customers, making companies more resistant to competition. And if you love a company's products, it is natural to conclude that it has superior management, too.
"
He goes on to write the following to overcome halo effect while analysing a business/stock:
"
You can adapt a procedure described by the Nobel Prize-winning psychologist Daniel Kahneman—who is widely admired for his insights into decision-making—in his forthcoming book, "Thinking, Fast and Slow." Start by identifying a handful of objective factors that you believe can predict superior returns. You might, say, include low debt as a percentage of total capital, stable earnings growth, high return on equity, low price relative to earnings and a history of raising prices without losing customers.
For any prospective investment, rate each of these financial factors on an identical scale—say, from 0 at the bottom to 5 at the top. Then add a final, subjective factor: your overall intuitive impression of each company and its management, rating them on the same scale. Finally, total all the scores and divide by the number of factors; the company with the highest average is the one you should favor.
"
Detailed article can be read
here.
