The Nike donation shows that in the world of business, a halo can be worth paying for

Phil Knight, the founder of Nike, made a $400m (£288m) donation to Stanford University to fund a scholarship scheme. Why do billionaires do this sort of thing?

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The Independent Online

In 1920, the American psychologist Edward Thorndike conducted an experiment on the boys in the barracks. He asked some commanding officers in the US military to evaluate the physical qualities of each of their troops. How neat were they? How solid were their physiques? How much energy did they have? Then he asked the same officers to evaluate their troops’ other personal qualities? Were they good leaders? How intelligent were they? Were they loyal?

Thorndike noticed a tight correlation between the ascribed physical and personal attributes of each soldier; tighter than seemed likely given that strength in one area doesn’t, when you think about, always naturally lead to strength in another.

So, if an individual soldier was deemed to be neat, he was also generally deemed to be a strong leader. If he was deemed to have only average intelligence, he was also seen as having only average energy levels. And so on. The officer’s general impression of the soldier seemed to blur together all of their personal characteristics. To Thorndike, this wasn’t just an army phenomenon but something common to all human organisations. He said he had “become convinced that even a very capable foreman, employer, teacher, or department head is unable to treat an individual as a compound of separate qualities and to assign a magnitude to each of these in independence of the others”.

Thorndike labelled this the “halo error”, since some of the favoured soldiers seemed to have an unmerited halo over their heads in the eyes of their superiors. The “halo effect” has since become a well-established psychological bias. It’s a rule of thumb for dealing with a complicated word. We often see good guys and bad guys. We don’t generally see people who are good in some activities but bad in others. Nuance gets squeezed out in a busy world.

It’s probably one of the reasons for the electoral success of Boris Johnson. The witty and amusingly chaotic Boris makes us laugh when he appears on TV, so he’s a good guy with good political judgement and worthy of our vote. Or so some people appear to think.

Last week, David Cameron drew attention to Jeremy Corbyn’s physical appearance at Prime Minister’s Questions, suggesting the Labour leader should “put on a proper suit, do up your tie and sing the National Anthem”. There is no reason why Mr Corbyn’s choice of attire should have any bearing on his political judgement or his qualities as a leader. But that was plainly the Prime Minister’s inference, and he might well be right. That probably is how opinion is formed, at least among a chunk of the population. Like those US officers who saw their neat soldiers as having the best characters, there is no doubt a halo effect with politicians.

Does this relate to economics? Yes because the halo effect can have economic effects. Many investors make the error of buying a company’s shares because they like its products, rather than considering whether or not its shares are overvalued, or whether it is actually a well-run company. Think of those people who say they own Apple shares because they like their iPhone. A top-selling product generates a halo.

When a company seems to be doing well commercially, people often assume that there is something especially clever about the way it runs its affairs, or its executives. The managements of the Wall Street banks attracted gushing plaudits from business gurus and commentators during the boom of the 2000s before they all blew up. That was the halo affect at work.

In fairness, it works in reverse too. Think of the opprobrium that attaches to the bosses of struggling companies, even when they might be making sensible strategic decisions. The company is in trouble, so the boss, many assume, must be a hapless incompetent. The opposite of a halo is a crown of thorns. And the same person can experience both. A genius yesterday can be a dunce today – something Jose Mourinho found when managing Chelsea Football Club. The halo effect is one of the reasons people tend to underestimate the powerful role of luck in all human affairs, especially business.

Perhaps the halo effect can be exploited too. Last week, Phil Knight, the founder of Nike, made a $400m (£288m) donation to Stanford University to fund a scholarship scheme. It was one of the largest individual donations ever to a university, matching a $400m gift from the hedge fund billionaire John Paulson to Harvard University last year. Why do billionaires do this? They argue that it is pure philanthropy: a desire to give something back and do some good. But many are more cynical about the motives, pointing to the tax incentives for such charitable gifts in America. But consider the halo effect too. Do good things and you are a good company. Give a shedload of money to a “good cause” and you are a good businessman or woman. Some have called corporate social responsibility programmes a form of reputation management.

Nike became caught up in the Fifa corruption scandal inquiry last year, as US investigators looked into “marketing fees” paid to a Brazilian sports marketing firm, allegedly to secure a sponsorship contract for the Brazilian national team in the late 1990s.

But isn’t this all too cynical? Is there any evidence that doing good confers any tangible form of commercial advantage? Well, research by Harrison Hong, of Princeton University, and Inessa Liskovich, of the University of Texas, looks at US firms that found themselves in the dock for bribery. These authors found companies tend to be treated more leniently by American public prosecutors if they have previously made a song and dance about their corporate social responsibility programmes.

Soldiers benefit from it, politicians pander to it and businesses can exploit it. It is useful indeed to have a halo.