Psychological Safety and Why Productive Teams Fail More

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• Highly productive teams are the ones most comfortable with admitting mistakes. Business professor Amy Edmondson says this candor is a key contributor to success.
• Through modeling their own embrace of failure, leaders can create a team culture of psychological safety. One of the best ways to overcome an innate fear of rejection is through reframing memories of negative reactions to failure.
• A learning mindset shifts the emphasis from performance metrics to productive self-reflection. Investors can apply this principle even in the high-stakes, metric-heavy world of fund management.

“Fail fast, fail often” is the frequent refrain of Silicon Valley start-ups, but there’s a careful distinction between hurried mistakes and the unexpected results of a thoughtful experiment. The latter is an intelligent failure — the kind that drives innovation forward and promotes a healthy work environment.

“In research, you will encounter failures because by definition you’re in new territory,” says Harvard Business School professor Amy Edmondson. “You’re trying to answer questions that haven’t been answered before.”

Amy is internationally recognized for her research on the concept of psychological safety in groups. She’s also the author of “Right Kind of Wrong: The Science of Failing Well,” a digestible how-to guide awarded the 2023 Business Book of the Year by the Financial Times.

Early in Amy’s career, she observed that highly effective medical teams were not necessarily the ones that made the fewest mistakes. The best teams were the ones most likely to report errors.

“Only by catching and correcting [mistakes] quickly can patients be given safe care,” Amy explains. Beyond having better patient outcomes, a culture of candor produces a more forgiving work environment, ultimately one where highly effective people want to stay.

This realization unfolded a framework for how to distinguish productive failure from foolishness — and the ingredients of a psychologically healthy workplace.

For investors, however, mistakes can have real and immediate financial consequences. What does it mean to fail well as a fund manager? To answer this question, Amy joined Kevin Coldiron on an Ideas Lab episode of Top Traders Unplugged. Despite the human tendency to hide our faults, Amy argues that an embrace of intelligent failures is at the core of new ideas and personal growth. Particularly for investors, there’s a fertile middle ground between failing fast and total risk aversion. Here’s how to make that distinction.

Understanding intelligent failure

Amy describes three types of failure. There are basic failures — mishaps due to a single cause — and complex failures, those we might call a “perfect storm” of multiple factors going wrong at once. Intelligent failures, though, are a different breed.

“They are undesired results of thoughtful experiments in new territory,” Amy explains. “They are the kinds of failures that occur because there was literally no other way to find out that information without trying it.”

The sentiment echoes the great inventor Thomas Edison, who is often quoted as having said he never failed; rather, he found several thousand things that won’t work. Intelligent failures are the basis of scientific inquiry. They start with a hypothesis and keep an open mind for unexpected results.

Most successful organizations will take steps to prevent basic failures. Picture accounting audits, safety switches on heavy machinery and project management softwares that keep action items from falling through the cracks. These are the realms of corporate training videos and standard operating procedures. For basic tasks, failure is undesirable. Productivity is largely correlated to how well people follow the rules.

Yet innovation is about breaking the rules. Progress in new initiatives often requires making space for the productive kind of failure. Core business functions, including new product development, supply chain management and resource allocation, necessitate some experimentation and adaptation regardless of industry.

In other words, checklists only get an organization so far. “In more uncertain, more variable contexts, the only way to produce excellence is by a genuine commitment to ongoing honesty, learning, experimenting and pivoting as soon as more is learned,” Amy says. The logic makes sense, but many organizations aren’t hardwired with a fail-friendly culture.

Creating psychological safety

In Amy’s research with health systems, she uncovered a striking correlation between low error rates and a punitive culture for mistakes. She realized this was a reporting bias — why would someone admit to a mistake if they thought they’d get in trouble for it?

“The better teams [were] more willing to speak up honestly and candidly about what’s really going on,” Amy reports. “This notion of candor and openness varied a great deal across teams, and it was ultimately predictive of team performance.”

Amy termed this variable “psychological safety.” In a nutshell, it’s the belief that risk-taking is okay and mistakes won’t be punished. Establishing this safe space for innovation is certainly easier said than done, if for no other reason than it goes against human nature.

We have an innate aversion to anything that might exclude us from a social group. Evolutionary psychologists call this a prepared fear — perhaps an early survival instinct to keep safety in numbers and avoid banishment from the tribe. This fear of rejection is so widespread across cultures that we hardly pause to question it, even though it’s completely unhelpful in the modern workplace.

“It’s so illogical to think that there could be copilots holding back when they see their senior officer make a dangerous error,” Amy says. “And yet, the history of aviation accidents is full of such moments.”

For leaders, the issue is particularly important. How does someone invite constructive criticism and new ideas without team members fearing they’ll face some sort of backlash? According to Amy, it starts with demonstrating healthy interpersonal risks.

Performance vs. learning mindsets

“First, you have to understand that we’re always framing,” Amy notes. “We look at reality through cognitive maps, through biases and expertise that lead us to pay attention to some aspects of reality and not necessarily notice others.”

Take the example of a fund manager focusing on a set of key performance indicators (KPIs) to gauge the success of an investment strategy. A performance mindset frames results in terms of the goals. Either the fund hit the KPI or it didn’t. Anything below the target performance is a failure.

A learning mindset, however, frames a missed KPI as an opportunity. The manager can understand what went wrong with their approach and apply that knowledge to future situations. Practically, Amy offers three tips for leaders to achieve this learning mindset in their organizations.

1. Demonstrate quality feedback

Constructive criticism is feedback someone can put to use. When speaking with a team member, focus on what they can learn from a situation rather than the subpar performance itself. Leaders can also model self-reflective feedback.

“Experts can see things that [others] miss and provide helpful, concrete feedback,” Amy says. “The other kind of feedback is feedback from the activity itself.” Amy advises taking a deep interest in the process of trying something new, studying the outcome instead of just holding it to a pass/fail test on a predetermined benchmark.

2. Practice by looking back

A learning mindset doesn’t have to wait for a failure to glean new information. Amy recommends reframing episodes from the past by asking how our reactions could have been more productive. Give quality feedback to yourself — what would you have done differently?

The practice pays off by inviting a more patient response to difficult situations. If your first reaction is negative, pause. “Take a look at your initial self-talk and challenge it for its validity,” Amy says. Usually there is a more rational, productive framing to choose.

3. Apologize well

Embracing intelligent failures doesn’t absolve someone of relational consequences. When a mistake hurts or disappoints someone, it’s appropriate to repair the relationship. Sincere apologies can lay the groundwork for a culture of psychological safety.

“[A good apology] acknowledges the harm, takes responsibility for your smaller or larger contribution to that harm and offers to make amends,” says Amy. This creates a sense of candor and openness that ultimately leads to more productive teams.

When stakes are high

It’s easy to accept intelligent failures in low-stakes experiments, but Kevin points out a common objection of most fund managers. “[Investors] are managing other people’s money,” he says. A well-crafted apology won’t cut it if the fund runs dry.

“In some sense, the stakes are always high,” Amy counters. “It’s [your] career, or it’s our planet or what have you.” Risk-taking doesn’t mean foolishness. For investors, it’s smart to never put more than you can afford to lose into a highly uncertain strategy.

Amy advises anyone to assume a new idea might fail. “We hope it doesn’t,” she says, “but let’s assume that it does. Make sure that the consequences of the failure are ones we’re willing to bear.“

Amy’s early research on health systems found that highly effective teams weren’t afraid to admit mistakes as soon as they noticed them, especially in high-stakes, life-or-death situations. She warns of a false dichotomy: Someone who’s honest about a mistake is not necessarily careless, lazy or incapable. A healthy work environment is one where people trust their team members to do their best even when something goes wrong. Excellence comes from candor.

New ideas vs. confidentiality

Sometimes the business risk is not so much in the possibility of failure but rather in the protection of trade secrets. If everyone on a team has a seat at the table to collaborate on product development or service line best practices, there’s a risk employees will take ideas with them when they leave the organization.

Kevin asks, “How, as a company, do you encourage openness at the same time, protect your intellectual property?”

For Amy, no company can avoid this risk completely. There will always be a tension between the positive impact of equipping employees to contribute and the real exposure of ideas leaking to competitors. Instead, Amy suggests a different approach.

“What you really want to do is make your place the place that nobody wants to leave,” she says. Any business is responsible not only to its customers but also to its current and prospective employees. Creating a culture of psychological safety ultimately boosts employee retention through valuing their input and making it safe for them to ask questions and be wrong. After all, intelligent failures are the ones that lead to productive learning. In many ways the mistake itself is not what matters — it’s how we view it and what we choose to learn from it.

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This is based on an episode of Top Traders Unplugged, a bi-weekly podcast with the most interesting and experienced investors, economists, traders and thought leaders in the world. Sign up to our Newsletter or Subscribe on your preferred podcast platform so that you don’t miss out on future episodes.