Megan McArdle on Failure, Success, and the Up Side of Down

Episode Summary

Executive Summary: Megan McArdle and Russ Roberts explore why failure is useful for learning at both personal and societal levels, arguing that markets, entrepreneurship, education, bankruptcy law, and criminal justice all work better when people can fail, recover, and try again. The conversation emphasizes reframing failure, reducing downside risk, and designing institutions that punish consistently but allow rehabilitation.

Main Topics: Failure as a source of information (Priority: 5/5): McArdle argues that failure is valuable because it reveals what does not work, enabling learning in business, science, and life. The discussion stresses that failure hurts, but that pain is part of the feedback process. Mindset, resilience, and self-handicapping (Priority: 5/5): The conversation contrasts fixed and growth mindsets, explaining how people protect self-image by avoiding genuine effort. McArdle describes self-handicapping and the need to normalize mistakes without denying them. Parenting, schooling, and the culture of risk aversion (Priority: 4/5): They criticize trophy culture, overprotective parenting, and elite educational tracking for discouraging experimentation and making children fear failure rather than learn from it. Entrepreneurship, markets, and survivorship bias (Priority: 5/5): Failure is portrayed as especially valuable in entrepreneurship because it generates information and builds resilience, but both speakers warn against romanticizing failure by ignoring those who do not rebound. Unemployment and job-search strategy (Priority: 4/5): McArdle explains how unemployment is psychologically punishing and how systematic, process-focused job search routines, mobility, and lowered reservation wages improve reemployment chances. Bankruptcy as a pro-entrepreneurship institution (Priority: 5/5): The U.S. bankruptcy system is presented as unusually forgiving and supportive of entrepreneurial risk-taking, with state-level variation showing that more generous exemptions correlate with more entrepreneurship. Probation, punishment, and rehabilitation (Priority: 4/5): A Hawaii judge’s swift-and-certain sanction model for parole violations is used to show that consistent, immediate, bounded punishment can reduce crime and help people reintegrate better than sporadic harshness.

Key Arguments: Failure is the mechanism through which people and institutions acquire information about what does not work; avoiding failure also avoids learning. Successful societies should help people recover from failure quickly so they can move on, rather than stigmatizing them indefinitely. A fixed mindset treats setbacks as a judgment on personal worth; a growth mindset treats them as data and practice. Self-handicapping—such as avoiding effort so a bad result cannot be blamed on ability—is psychologically protective but economically and personally destructive. Children should learn failure early, when consequences are lower, rather than being insulated until adulthood and then overwhelmed by larger setbacks. Entrepreneurial ecosystems reward people who have failed before because prior failure can improve judgment and resilience. Romanticizing failure is dangerous because survivorship bias hides the many people who fail repeatedly and never recover. In job search, the main discipline is process: consistent effort, repeated outreach, and mobility matter more than emotional reassurance. The U.S. bankruptcy system lowers the cost of risk-taking and helps entrepreneurship by giving debtors a genuine fresh start. Punishment works best when it is certain, immediate, proportionate, and designed to preserve future participation in society. Institutional designs that keep people connected to work, family, and the community are more effective than purely punitive approaches.

Data Points: Interview date: March 18, 2014 - Introductory metadata for the EconTalk episode Podcast archive start: 2006 - Roberts notes that EconTalk archives go back to 2006 Unemployment-benefit scarring threshold: about 6 months - McArdle says job prospects drop sharply after about six months in the labor market Memphis bankruptcy rate: around 1% per year - McArdle describes Memphis as having a very high annual bankruptcy rate Average income in Memphis: low $30,000 range - Used to explain local bankruptcy prevalence and credit conditions People in parole program who raised their hands for dirty test: about two-thirds - McArdle describes a Hawaii program where offenders admitted they would test positive before the hearing Reduction in prison terms under Hawaii parole model: cut in half - Judge Alm’s sanction system reduced the rate of eventual prison terms by 50% Time period for U.S. bankruptcy code establishment: 1898 - McArdle notes the U.S. did not have a bankruptcy code until 1898 Selective-college pressure example: 5% - A 10th-grade student said only 5% in her IB program could get a 4.0 Entrepreneurial asset-market bubble experiment: 2 or 3 repetitions - Vernon Smith and Bart Wilson found bubbles diminish when the same participants trade together multiple times Employment support in probation model: 100% controllable compliance items - Participants can fully control whether they show up and whether they pass drug tests

Pivotal Quotes: "The opposite of failure is not safety. It's nothing." — Megan McArdle: She explains that success and failure are part of the same trial-and-error process "Once you've failed publicly and spectacularly, it's like the best thing that can ever happen to you because after that you're fearless." — Tina Brown (quoted by Megan McArdle): Used to illustrate how public failure can reduce fear of future risk "Everyone in this room wants you to succeed." — Judge Alm (described by Megan McArdle): The judge’s opening message in the Hawaii probation program, emphasizing rehabilitation over adversarial punishment

Implications: For individuals and institutions, the lesson is to tolerate reversible failure, reduce downside risk, and build systems that reward learning. For policy, that means better bankruptcy, education, labor-market, and criminal-justice design.