Why Failure (Can Sometimes) Drive (Good and Bad) Innovation

I've altered the title of the original article to reflect reality. Things are rarely as simple as they appear from professors or consultants. (But complexity doesn't sell books does it?)

A little background…

I've coined two terms that describe how people view failure: the type 1 mindset, and the type 2 mindset.

The type 1 mindset is fearful of making mistakes. It characterizes most individuals, managers, and corporations today. In this mindset, to fail is shameful and painful. Because the brain becomes very risk averse under this line of thinking, innovation is generally nothing more than incremental. You don't get off-the-charts results.

The type 2 mindset is fearful of losing out on opportunities. Places like Silicon Valley and the Stanford Graduate School of Business are full of type 2s. What is shameful to these people is sitting on the sidelines while someone else runs away with a great idea. Failure is not bad; it can actually be exciting. From so-called “failures” emerge those valuable gold nuggets — the “aha!” moments of insight that guide you toward your next innovation.

We generally start out with the type 2 adventurous spirit as children. But then somewhere along the line, often in school, we are squelched. Failure is not allowed. We become type 1s.

While I'm sure Professor Shiv does not advocate this approach for everything, he might be forgetting that the fear of losing out drove much of the financial innovation, culminating in a crisis.

So how do you get people and corporations to shift from 1 to 2?

One approach is to engage them in rapid prototyping — the process whereby they brainstorm wild new ideas, and then quickly develop a physical model or mock-up of a solution. This allows people to move quickly from the abstract to the concrete, and lets them visualize the outcome of their ideas. It gives the brain richer inputs.

This approach also allows numerous psychological biases the time and space needed to work their magic and wreck havoc on good decisions.

And for number two, Shiv recommends scarcity (a living example of this can be seen in the Sears approach):

Another way to shift people into type 2 thinking is, paradoxically, to instill in them a sense of “desperation.” This is done by cutting resources so that they are forced to devise new solutions. As we know, necessity is the mother of invention.

Rather than thinking about failure in terms of type 1 and type 2, people would be better off following an approach advocated by Warren Buffett: You are not a box.

Fund consultants like to require style boxes such as “long-short,” “macro,” “international equities.” At Berkshire our only style box is “smart.”

Read the article.