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Microeconomic issue- halo effect - Essay Example

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The Halo Effect explains many things in the world, from how Bernie Madoff was able to fool thousands out of an estimated $50 billion over forty years and why millions of people bought the iPod and iPhone. Every time one sees on the television or computer screen the face of a…
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Microeconomic issue- halo effect
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Download file to see previous pages nsumers tend to associate the positive quality of a personality’s image with a product and its brand, and since consumers have aspirations and desires, the seller hopes that the image associated with the product is powerful enough for the consumer to take action; first, to desire the satisfaction associated with the image, and second, to think that the product and brand linked to the image would be the means to achieve that satisfaction. This association between a person’s reputation and his words and actions is what the Halo Effect is all about (Economist.com).
Thorndike in a 1920 study observed the Halo Effect at work in a study involving soldiers and the way they rated their officers. He discovered that when soldiers viewed their officer in a positive way, all the officer’s actions are viewed positively. This is the way a son would treat the punishment from a father whom the son admires: every punishment is for the son’s good, no matter how unjust the punishment may seem to an outside observer.
Applied to microeconomics and the behavior of firms and consumers, the halo effect can be observed at work in many instances. In fact, the global economic crisis may have been caused by the halo effect, and the same halo effect is being used to get the world out of the crisis. Rosenzweig, writing in the McKinsey Quarterly, observed how the halo effect could explain both business success and failure, emphasizing the importance of consumer or observer perception in determining economic behavior.
Among the horror stories associated with the crisis, the investment scam of Madoff shows how the halo effect contributed both to his success and failure. Madoff was an investment banker who served as the Chairman of NASDAQ, the over-the-counter stock market that boomed in the late 1990s. According to the New York Times, Madoff was able to head NASDAQ because of his high-profile lifestyle and low-key consistency in generating above-average returns for investors. His ...Download file to see next pagesRead More
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