Everyone makes mistakes—every entrepreneur, every business leader, every employee. The mark of a great company isn’t that it avoids failures—that’s impossible—but that it has the wisdom to take full advantage of them.

Behavioral economics tells us that we humans are short-sighted by nature. We are wired to seek out evidence that confirms what we already believe and to ignore evidence that contradicts it. On top of that, we are usually overconfident, thinking we know more than we do and underestimating how much we don’t know.  This leads to tunnel vision and myopic judgments. The great virtue of mistakes, whether by accident or design, is that they widen your range of experience and shrink your ego—and thereby open you to discoveries you’d otherwise never make.

Stumbling on Chaos

History is full of such brilliant mistakes. A notable one occurred in the early 1960s at MIT. Meteorologist Edward Lorenz had just completed a large round of simulations of a weather system and wanted to repeat the experiment over a longer time frame. Rather than waste valuable processing time, he manually typed in final numbers from the results table.  To his surprise, the second simulation diverged radically from what he expected. He puzzled about it for days. Then it struck him: he had entered numbers using a computer printout that rounded all numbers to three decimal places, whereas the computer stores six decimal places. This tiny rounding error pushed the second simulation onto a markedly different path. In that sense, the exercise was a failure.

But the apparent error led Lorenz to a far more significant discovery. In a complex system, tiny changes in the initial inputs can cause massive changes at a later stage. Lorenz’s discovery is now known as the “butterfly effect”—after the notion that the fluttering of a butterfly’s wings can ultimately lead to a tornado halfway around the world—and is one of the foundations of chaos theory. For his brilliant mistake, Lorenz was awarded the 1991 Kyoto Prize.

The Lorenz example illustrates the two prime ingredients of a brilliant mistake:

  1. Something goes wrong far beyond the range of prior expectation; and
  2. New insights emerge whose benefits greatly exceed the mistake’s cost.

The brilliant part lies especially in condition (2), but also in recognizing that (1) is necessary for (2) to occur. You want to increase the chance of (1) and (2) occurring together. When they do, you could have a brilliant mistake on your hands. 

Golden Egg on Your Face

It’s not easy to get your business to view failure so positively, but it can be done. The president of an Ann Arbor, Michigan business concocted what he calls the Golden Egg award to make sure his people would extract as much learning as possible from failures.  He asks managers to share their mistakes at a monthly meeting not unlike the mortality and morbidity reviews hospitals hold to learn from medical errors.  At first participants were reluctant to open up, but eventually these confessionals became a favorite part of the session.

The manager who presents the best mistake of the month gets the Golden Egg trophy—a spray-painted L’eggs pantyhose plastic egg. Initially,  the trophies stayed in the desk drawer of the (un)lucky winner.  But over time, winners became proud enough to place the trophy on their desk for the entire month.  This naturally prompted conversations with visitors about with how managers were able to convert egg on their face into omelets rich with insight and learning.  In short, the president managed to change the culture from one that hides mistakes to one that celebrates them.  You can do likewise, and your company will reap the benefits.

You have until February 1 to enter the Wharton School’s Brilliant Mistake competition, co-sponsored by Inc, and earn prizes considerably more valuable than a plastic egg. The most brilliant mistake wins a complementary registration for two at Inc’s Growth Companies event in March 2012, free airfare on Southwest, a seat at a VIP seminar with conference speakers, and other goodies. Go to the Brilliant Mistakes Contest website to learn how to enter.