Failure is Always An Option: Character Defeat is Player Victory Too
The biggest benefit of failure being entertaining for players, is that they can stop worrying about try to play to win, and instead concentrate on playing their characters in a way that’s entertaining. This is how HeroQuest facilitates heroism – not with Hero Points there to save the character’s bacon, that doesn’t work a remarkable amount of the time – it’s loving failure as much as victory that drives players to have their Heroes act, well, like heroes.
My personal favorite bit:
make failure mean that he has to abandon the previous contest, and deal with an entirely new problem. This creates more action, and means that failures have a lot of bite. It also often means that it’s dramatically allowable for the player to come back to the original contest if he takes care of the new one. For instance, if the character defeats a guard who caught him picking the lock, then you can allow him another shot at it, with new stakes. Perhaps this time it’s to open the lock in enough time to get back to somebody he’s supposed to meet. Make sure to escalate the consequences here, however, else you risk this becoming just another case of allowing multiple stabs at the goal.
When in doubt, make the failure stick, but give the player a whole new set of circumstances to deal with, rather than allowing him to come back to a previous contest. But do make sure that this new set of circumstances is at least as dramatically compelling as those that were lost with the failure.
Quite simply, never allow failure to be a dead end to player options.