February 17, 2015

Avoiding the "Failure Loop"

In previous blogs, we discussed what the experts were saying about how to nurture and sustain people and groups that concentrate on inventing new products, processes, and services. Some mentioned unique cultural factors. Others focused on how universities like Stanford encourage professors and students to interact with people in business, government, and nonprofit organizations. Still others attributed innovation to concentrations of diverse people living in relatively small areas, like Boulder, Colorado. One theme running through these observations is that quitting isn’t an option, despite what W.C. Fields had to say about trying and failing.

And that’s a good thing, because innovation and failure go hand-in-hand, according to NPR’s “Planet Money” founder Adam Davidson. People and organizations that innovate risk failure. Their ideas may not work or, if they do, others may come along and exploit them to their advantage. Davidson calls the time between innovation and failure the “failure loop,” and the loop is getting shorter and shorter as innovation keeps accelerating. The loop’s fallout can be seen in the buildings that dot Silicon Valley.  “These squat buildings have thick outer walls that allow for a minimal number of internal support beams, creating versatile open-floor plans for any kind of company,” Davidson wrote. The companies that occupy these buildings “expand quickly or go out of business, and the office has to be ready for the next tenant.”

The failure loop started to shrink in the late 1800s when innovative people developed the legal, financial, and organizational means to spread the risk involved with innovating. The business corporation, for example, “acts as a giant risk-sharing machine, amassing millions of investors’ capital and spreading it among large number of projects, then sharing the returns broadly too,” Davidson stated. But new organizational forms are nipping at the corporations’ heels.  Thanks to computers, the iconic corporate pyramid is giving way to loose, decentralized networks of individuals and small groups.

The shrinking failure loop also disrupts how we live and work. “Rather than undertake one career for our entire working lives, with minimal failure allowed, many of us will be forced to experiment with several careers, frequently changing course as the market demands—and not always succeeding in our efforts.” How do we cope with these seismic disruptions? By building “a new set of institutions, something like the societal equivalent of those office parks in Sunnyvale (California), that help us stay flexible in the midst of turbulent lives,” according to MIT economist Daron Acemoglu, whom Davidson discusses in his article. Specifically, “we’ll need modern insurance and financial products that encourage us to pursue entrepreneurial ideas or the education needed for a career change. And we’ll need incentives that encourage us to take these risks; we won’t take them if we fear paying the full cost of failure.”

Click here to read more in a New York Times Magazine article.