The psychology of failure

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Wealth and success will very often have failure as part of their foundations. Among the high net worth individuals surveyed for this report, 59% say that they have experienced career failure, which might include failure to get a promotion or losing a job, while a similar proportion have experienced failure with their investments (see chart 2). Entrepreneurial and business failure are slightly less common, with 49% of entrepreneurs saying that they have experienced this form of failure and 43% of non-entrepreneurs (see chart 3).

Turning failure into success 5 of 7 Understanding failure 3 of 7

Residents of the United States, please read this important information before proceeding

Please read this important information before proceeding.

Failure can be a devastating blow, both personally and professionally, and many people find it difficult to put the experience behind them. But respondents who identified themselves as entrepreneurs in the survey find it easier to recover. Three in ten said they were able to bounce back quickly and 34% said they were encouraged to try again. Those who identified themselves as non-entrepreneurs, however, were less able to bounce back quickly from adversity (see chart 12, page 32-33).

Staring failure in the face

So what is it that makes entrepreneurs better able to recover from major setbacks than non-entrepreneurs? At the most basic level, failure is an inherent part of the entrepreneurial journey. Most venture capital models are built around an expectation that only a small proportion of their investments will succeed. Although portfolio strategies differ, a general rule of thumb among venture capital firms is that 40% of their investments will fail, 40% will produce a moderate return on capital, and 20% will provide a high return7. A willingness to confront these kinds of odds demands entrepreneurs who are persistent, optimistic, tolerant of risk — and probably lucky as well.

Chart 2
What experience do you have of failure?*

Chart 3

Of frogs and failure

Many academics have tried to categorise entrepreneurial failures to provide a framework for thinking about how and why companies hit the wall. One of the more unusual is the metaphor of the “frog,” whereby failed entrepreneurs can be classified into four main amphibious types:

Boiled frog: It is often said that a frog dropped into boiling water will immediately leap out again whereas one placed in cold water that is then heated gradually will not. There is no experimental evidence for this phenomenon but the story has stuck. In an entrepreneurial context, the boiled frog refers to an entrepreneur who does not pay sufficient attention to a changing environment. He or she becomes complacent and fails to notice how factors such as competition, changing technology or evolving customers are rendering their business model obsolete.

Drowned frog: As their business grows, many entrepreneurs continue to think that they need to be everywhere at once. They try to be “king of the pond” and spread themselves across every aspect of the business but often lack the necessary breadth of skills to do this effectively. Avoiding this fate requires the entrepreneur to build a strong team around them, delegate and take the right advice.

Bullfrog: Early success can encourage some entrepreneurs to become too fond of the trappings of success. These bullfrogs put their own needs above those of the business. They consider themselves to be indestructible and do not acknowledge that their actions harm the business financially.

Tadpole: Many entrepreneurial ventures will never fulfil their promise and are doomed to remain as tadpoles. Despite early promise, they do not reach their potential and fizzle out without reaching the next stage of growth8.


John Gartner, a Clinical Assistant Professor of Psychiatry at Johns Hopkins University, argues in his book The Hypomanic Edge that many well-known entrepreneurs have a temperament called hypomania — a genetic form of mild mania that endows people with energy, creativity, enthusiasm and a propensity for taking risks. These are all traits that can help entrepreneurs through adversity, even when others lose faith. “One of the things about having this kind of confidence is they’re kind of risk-blind because they don’t think they could fail,” writes Professor Gartner. “If they fail, they’re not down for that long, and after a while they’re energised by a whole new idea.”

Hypomania certainly has its downsides, but pure persistence seems to be unambiguously healthy from a psychological point of view. Our survey finds that entrepreneurs are more persistent than non entrepreneurs and also uncovers a strong association between persistence and the level of life satisfaction that individuals enjoy. Respondents who say they are satisfied in their lives are more likely to consider it important to persist with a failing business endeavour rather than to cut losses and move on (see chart 4). Persistence also seems to reduce the chances of failure, with respondents who rate themselves as persistent less likely to have experienced severe setbacks in their lives (see chart 5). Persistence, it seems, is a valuable life skill that helps individuals reduce the chance of failure and increase their levels of satisfaction.

As we argued in the previous section, the challenging business environment that many entrepreneurs face in emerging markets necessitates an especially strong dose of persistence. Our survey corroborates this as respondents located in emerging, fast-growth regions of the world are the most likely to report high levels of persistence (see chart 6). The high rates of persistence in emerging markets reflect the difficulties of building a successful venture in these economies, and the fact that entrepreneurs in emerging markets can face setbacks for a variety of reasons that are beyond their control. In such an environment, only entrepreneurs who have this determination will survive.

Yet persistence is a double-edged sword. Although entrepreneurs require tenacity to overcome the obstacles to business success, they also need to know when a business plan is not working. Many entrepreneurs can be susceptible to over-confidence, and this means that they will pursue ventures long after it has become clear that they are destined to fail. They may also fall victim to the sunk cost fallacy, investing more in a project on the grounds they have already allocated time and resources to it, rather than admitting defeat and accepting that the original investment is lost. It is therefore critical for entrepreneurs to know when they are being too bull-headed and to admit when “enough is enough.”


Over the years, numerous academic studies have demonstrated that optimism confers real benefits on psychological and physical well-being. Research has shown that optimists are more likely than pessimists to report that their lives are interesting and diverse, cope better during times of difficulty and even recover more quickly after surgery and health problems. Our survey provides further evidence of this link. Respondents who have a high level of optimism were more able to bounce back from failure than those with low levels of optimism and are also more encouraged to try again (see chart 7).

High levels of optimism do not only create a rosier outlook on life, but can also increase the chances of success. A study of life insurance salespeople by Martin Seligman of the University of Pennsylvania found that those who scored highly on levels of optimism sold 37% more insurance in the first two years of hiring than those with a more pessimistic outlook9. “People who are optimistic are more likely to be confident in their abilities,” says Tali Sharot, a Neuroscientist and Author of The Optimism Bias: a Tour of the Irrationally Positive Brain. “That confidence leads to a view that they will do better and that becomes a prerequisite for success.”

Our survey also shows a link between optimism and success. In general, the more success respondents have experienced, the more likely they are to describe themselves as optimistic. Optimists are more satisfied with their lives, have a stronger belief that their success is due to ability, rather than luck, and are much more likely to consider pursuing other goals when they experience major setbacks (see chart 7). People who are optimistic also earn more, according to our survey, bringing in USD$56,000 more in income per year and owning USD$620,000 more in net worth. Of course, it is difficult to determine whether optimism breeds success or vice versa, although academic literature suggests that the relationship travels in both directions.

There are downsides of optimism, however. Our survey finds that pessimistic individuals tend to be better at learning from failure than their more optimistic peers. This is because they tend to have greater attention to detail, and may be better “risk managers” than individuals who are more confident that everything will go their way. Research has also shown that entrepreneurs are more optimistic than non entrepreneurs. For example, by studying actuarial tables and consumer finance surveys, the Academics Manju Puri and David Robinson10 found that entrepreneurs are much more likely than non-entrepreneurs to think that they will enjoy a longer life span. In another paper, Puri and Robinson again used consumer finance surveys to conclude that, in general, optimistic people work harder and anticipate longer careers11.

To some extent, this optimism is necessary as a pre-condition for counteracting the high odds that a venture will fail. If entrepreneurs were entirely rational about their chances of success, then they may conclude that their venture is doomed from the start. But, because many are highly optimistic, they believe
that the high chances of failure do not apply in their case. “If entrepreneurs were realistic, then most of them would admit that they will not succeed, and that would mean that we have far fewer entrepreneurs,” says Neuroscientist Ms. Sharot. “People consistently overestimate the positive chances of success and underestimate the negative chances of failure.”

Entrepreneurs can also underestimate the time or complexity required by a venture and the difficulty of achieving success. According to the planning fallacy, individuals will very often find that projects take longer than expected, cost more and do not achieve the expected benefits. The reason for this is that when planning their venture, individuals may focus on the most optimistic scenario and assume that because a similar project went well in the past, a subsequent one will also be successful.

“In our experience, the entrepreneurial client is happy to cover the obvious risks, such as property, equipment and vehicles, but often fails to recognise the important risks related to themselves, key employees or other shareholders,” says Richard Phelps, Head of Barclays Corporate & Employer Solutions. “The entrepreneur’s eternal optimism often means that, not only can they not see their business failing, but they see themselves almost as invincible. Protecting against ‘people risks’ does not cross their mind. The consequences of this can be particularly damaging. For example, losing a key employee and related revenue when negotiating the sale of the business could result in losing the sale or in a reduced price.”

Optimism, persistence and the financial investor

Optimism can be a valuable trait for financial investors as well as entrepreneurs. Our survey finds that optimistic individuals are less likely to report having experienced failure in their personal investments. One important reason why optimistic individuals experience better outcomes with financial investments is that they are less likely to respond unwisely to short-term fluctuations in their portfolio.

Persistence can also have financial benefits, with investors who describe themselves as persistent less likely to have experienced investment failure (see chart 9). A persistent approach means that investors are more willing to “stay the course,” and do not see a short-term reduction in the value of their assets as a setback or failure. “Investment losses in a diversified portfolio are only true setbacks if you need the money right away or if you react to the losses as a failure, by giving up on the journey and selling low,” says Dr. Greg B. Davies, Head of Behavioural Finance, Barclays. “If you are not forced to sell because you have run out of liquidity, then investment losses on a diversified portfolio are genuinely nothing more than a temporary setback on paper, with limited real effects.”

Indeed, a temporary fall in asset prices should be seen as an investment opportunity. Our survey finds that investors who experience positive investment outcomes agree that the recent global financial crisis has provided them with opportunities. For investors who are willing to take risks, there is considerable uplift potential to be gained from buying when markets are low. This is what Warren Buffett meant when he said: “Be fearful when others are greedy and greedy when others are fearful.”

Optimism and persistence can be profitable qualities in financial investors but this does not mean that entrepreneurs are automatically good investors. One common problem among entrepreneurs as financial investors is that they will seek to apply the same level of control they have in their own business to their financial investments. “In business, the right thing to do is generally to ramp up what has worked and scale back what has not, but in a diversified financial investment portfolio, you should do the opposite,” says Dr. Davies. “You should buy more of assets that have decreased in value, and sell those that have risen: in other words, rebalancing in an attempt to buy low and sell high.”

Entrepreneurs may invest too narrowly in companies that are related to their own on the basis that they “know” more about that sector. If they do this outside of the context of a well diversified portfolio, this can leave them exposed to unnecessary risk. Or, when they experience a short-term investment loss, they may carry out excessive trading activity in an effort to compensate for fluctuations that are more likely to be random and temporary, rather than genuine losses.

“You commonly find that they try constantly to adjust to conditions and respond to perceived risks,” says Dr. Davies. “This leads to drag on returns through transaction costs, but can also lead to over-concentration due to over-confidence, or to a ‘behaviour gap’ through buying assets when markets are higher, and selling when they’re lower.”

The lesson for any investor — entrepreneurial or otherwise — is to determine just how controlling they should be with their financial investments and, if necessary, step back and let diversification do its job. There are clear benefits from doing so. Our survey finds that investors who see the value of diversification tend to have either experienced severe investment failure or no investment failure at all (see chart 10). Investors who see the value of diversification are unlikely to have experienced a major investment failure, while those that have gone through that experience have learned their lesson and understand that diversification is the only way to avoid repeating it.

Untangling skill and luck

In the late 1990s, the founders of Google, Larry Page and Sergey Brin, tried to sell their fledgling business for USD$1.6m12. After knocking on the doors of various venture capital and technology firms, they gave up because they were unable to find a buyer. With hindsight, this failure was an extraordinary piece of good fortune. Today, the company has a market capitalisation of more than USD$225bn — thousands of times more than what they were hoping to sell it for in the 1990s.

As this story demonstrates, luck plays an important part in both successes and failures. Yet, very often, successful individuals downplay its importance.
According to the attribution bias, individuals are more likely to recognise the role of luck when things go badly, and less likely to do so when things go well. “People tend to attribute good outcomes to their own skill and judgement, whereas they are more likely to associate bad outcomes with luck,” says Dr. Davies. “If you start to attribute every good outcome to your own skill, but
see setbacks as unavoidable despite your evident skill, the result will be hubris. Over time, you will conclude that you must be a really good decision-maker and
pursue risky ventures with a level of certainty that is increasingly inappropriate.”

Care must be taken, however, to distinguish between pure chance and luck that an individual manages for themselves. Consider an entrepreneur who attends
a networking event and, seemingly by chance, meets someone with a similar interest with whom he develops a product that goes on to be a huge success. Was it just lucky that he attended the event, or were there other factors besides pure chance involved? For Michael Mauboussin, Chief Investment Strategist at Legg Mason Capital Management and Author of The Success Equation: Untangling Skill and Luck in Business, Sports, and Investing, this should not be defined as luck at all, because attending the event was something within the entrepreneur’s control. “You can’t create your own luck but you can manage it,” he explains.

It is striking that, among the entrepreneurs, business leaders and sports people surveyed for this report, few see luck as a major factor in their success. Entrepreneurs give equal weighting to effort/hard work and skill/intelligence, estimating that one-third of their success comes from each of these factors. Business leaders attribute a slightly higher proportion to skill and intelligence, rather than effort, while sports people focus more on hard work. For all three categories, chance and connections are seen as much less important, although, as might be expected, entrepreneurs and business people value connections more than sports people (see chart 10). “You can make your own luck by being alert to opportunities, minimising risk, and doing the hard work and planning that will plant the seeds for future success,” says Donald Van de Mark, former CNBC Correspondent and Author of The Good Among the Great: 19 Traits of the Most Admirable, Creative, and Joyous People.

Mr. Mauboussin points out that people find it very difficult to separate the role played by luck and skill in their success and failure. “Every successful person is
both skilful and lucky but we tend to focus on skill as the explanation for their success,” he explains. “This is because the human brain struggles to deal with the role played by randomness, and will seek to interpret an outcome as a chain of cause and effect that can be easily understood.”

This has significant implications in both the business and investing worlds. An entrepreneur who experiences success may attribute it to their own skill and ignore the role played by luck in getting them there. Equally, a financial investor may attribute decisions that lead to an increase in the value of their portfolio to good judgement, forgetting that randomness and pure good luck can also play a role. The result is that this success may be short-lived. “Any system that combines skill and luck will revert to the mean over time so it is important
to ask yourself what could have been achieved by chance alone,” says Mr. Mauboussin.

Given this strong belief in skill rather than luck, as a determinant of success, both entrepreneurs and investors need to be on their guard. If an individual downplays the role of luck in their success, then that can impact the way in which they make future decisions, and the long-term health of their venture or portfolio. “Strong belief in skill rather than luck could give you a degree of over-confidence in future decisions, which can eventually result in a major setback because you end up taking more risks on the assumption that your success has been wholly attributed to your own good decisions,” says Dr. Davies.

Framing our failures

We have seen that entrepreneurs have a stronger ability than non-entrepreneurs to bounce back from adversity and that this can, in part, be attributed to the traits of persistence, optimism, risk-taking and luck. But perhaps the most crucial determinant in the ability of an individual to recover from setbacks is how they perceive the experience, which is itself closely linked with those traits.

An entrepreneur or individual who experiences failure and concludes that it is a catastrophic event from which it will be difficult to recover will not learn from the experience, and will make it difficult to experience success in the future. Instead, the key is to see setbacks as a learning opportunity and have in place a diligent process for gathering feedback to ensure that the risk of future failure is minimised. “It’s very important when you suffer a setback to look back, work out what your contribution was and determine how you need to change your behaviour,” says Mr. Van de Mark. “When successful people fail, they are able to detach themselves from the setback, take stock and see the world and their weaknesses very clearly. And that takes humility, even courage.”

Alexis Dormandy, Founder of LoveThis, a social recommendation application, and a Blogger for the Daily Telegraph, agrees, “Too often, we define failure as the whole venture having gone wrong rather than something that can be improved.” Mr. Dormandy continues, “I think if we defined it as something that could be improved, our society would be a lot more dynamic. There is something seriously wrong with a culture where you try one thing, are perceived as having failed and consigned to the scrapheap of life. That is going to discourage anyone from trying anything.”

For some individuals, the inability to solve a problem may be perceived as a failure, but others will regard it as a temporary setback and an opportunity to learn. “Failure is in the eye of the beholder,” says Carol Dweck, Lewis and Virginia Eaton Professor of Psychology at Stanford University and the Author of Mindset: How You Can Fulfil Your Potential. “What for one person is
a humiliating failure will be a temporary setback for someone else. Successful people often consider these challenges as steps along the way.”

This applies as much to financial investments as it does to business ones. Any individual with an investment portfolio will experience some points in time when their investments perform poorly. But what is critical in this situation is how they react to that loss. “The biggest risk is that you respond badly to these times of adversity by selling at the bottom and locking in the loss,” says Dr. Davies. “By seeing loss as a failure, you actually turn it into a failure. Whereas, if investors can think more broadly and see it as a setback along a journey, then they can view that event through a different lens.”

National Venture Capital Association Frequently Asked Questions

8 Understanding the Causes of Business Failure Crises: Generic Failure Types: Boiled Frogs, Drowned Frogs,

Bullfrogs and Tadpoles; by Bill Richardson, Sonny Nwankwo and Susan Richardson

9 Learned Optimism: How to Change Your Mind and Your Life by Dr. Martin Seligman

10 Optimism, work-life choices and entrepreneurship, World Bank paper by Manju Puri and David T. Robinson

11 Optimism and economic choice, by Manju Puri and David T. Robinson, Journal of Financial Economics, Elsevier, vol. 86(1),

pages 71-99, October

12 Everything is Obvious – Once You Know the Answer by Duncan Watts