Most new ideas, products, and businesses fail. Failure is not just ubiquitous and painful, but it also is an essential source of learning for individuals and organizations. But are we using it the right way? Do we embrace it as an unavoidable, and indeed valuable, part of life, or do we try to avoid it at all cost?
Megan McArdle — who hardly needs to be introduced to the Umlaut readership — says with tongue in cheek that she was prompted to write her forthcoming book about failure by the simple principle of “write what you know.” The Up Side of Down is often an unusually personal book, replete with anecdotes as well as with solid references to research coming from various fields of social science.
Megan shows the common thread of psychological and institutional biases going through situations in which people confront failure. The differences in how we handle mistakes, errors, and failures, she argues, go a long way to explain the success of individuals, companies, and societies.
Failure should lead to a corrective adjustment. An idealized example of such adjustment can be found in the classic experiments by Vernon Smith, in which the subjects, placed in a stylized competitive marketplace, quickly learn when bidding too much or too little does not deliver the desired outcome. These experimental markets very quickly converge to equilibria and produce efficient outcomes.
The world falls short of this ideal. Even in the lab, once researchers moved their subjects to experimental settings with fuzzier or undefined rules, the experiments yielded a variety of outcomes, many of them quite disheartening.
In short, when not subjected to the instant discipline provided for example by the competitive market, people and organizations are prone to ignore their mistakes and compound them collectively by trying to avoid failure at all cost, not recognizing it, or drawing wrong lessons from it.
At their core, the factors driving our inability to process failure are psychological. Our reluctance to disregard sunk costs in making our decisions is one culprit, says Megan: