Academy of Management

By Daniel Butcher

Elizabeth Holmes, who was convicted of fraud for lying about the effectiveness of the blood-testing product of her biotechnology company, Theranos, is a cautionary tale illustrating a potential downside of entrepreneurship. Unable to deal with the failure of her company’s blood-testing methods, she just plowed ahead, refusing to acknowledge the disappointing results or telling any of the investors—or anyone else—that the tests weren’t working. She pretended like everything was okay, continued to collect investor money, and built up the biotech startup to a $9 billion valuation.

Academy of Management Scholar Dean Shepherd of the University of Notre Dame said that it’s common for entrepreneurs to deal with failure poorly, but investors failed to effectively scrutinize Theranos.

“A lot of the stakeholders there were maybe willfully ignorant—they wanted to believe her,” Shepherd said. “They didn’t ask probing questions; they ignored the negative signals, which is what we call a confirmation device.

“They look for information that confirms their opinions, and they discount or ignore information that disconfirms them, and so in many ways, she was negligent, but they were also negligent,” he said.

Sometimes entrepreneurs can’t even acknowledge failure to themselves, much less publicly, because their entire identity is wrapped up in success. One major failure could crack that self-image.

Shepherd said that job loss—or the failure of one’s business—can devastate a person’s sense of identity. He wrote about his research findings related to such phenomena in Hitting Rock Bottom After Job Loss: Bouncing Back to Create a New Positive Work Identity.

“Failure can have a huge impact on you psychologically, because your identity is quite often highly related to the things that you do for work, and when you lose that identity, you go into a crisis or a freefall, because you don’t know who you are anymore,” Shepherd said. “And if you don’t know who you are, you don’t know how to socially act, and it can be a very dangerous situation.”

Author

  • Daniel Butcher is a writer and the Managing Editor of AOM Today at the Academy of Management (AOM). Previously, he was a writer and the Finance Editor for Strategic Finance magazine and Management Accounting Quarterly, a scholarly journal, at the Institute of Management Accountants (IMA). Prior to that, he worked as a writer/editor at The Financial Times, including daily FT sister publications Ignites and FundFire, Crain Communications’s InvestmentNews and Crain’s Wealth, eFinancialCareers, and Arizent’s Financial Planning, Re:Invent|Wealth, On Wall Street, Bank Investment Consultant, and Money Management Executive. He earned his bachelor’s degree from the University of Colorado Boulder and his master’s degree from New York University. You can reach him at dbutcher@aom.org or via LinkedIn.

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