I'm reading the book entitled Learned Optimism by Martin Seligman at the moment. It was "sequel" to his book Learned Helplessness. It discusses the effects of an optimistic attitude in life on a variety of factors including both psychological and physical health.
Student Perception Is Everything
One aspect that is extremely interesting is that it all comes down to perception. If you believe you are a failure, you are. This is regardless of what reality is taking place around you. The best example in the book so far was a passage that described an experiment with University of Pennsylvania students. They were asked about an upcoming exam and what grade would constitute a failure in their minds. The average response was a B plus!
Obviously, U.Penn. students are very driven and the cream of the crop in academic quality. However, this makes the point to me that teachers do not have to "fail" students on their assignments for the students to believe they have failed. Regardless of what grade you give as a teacher, it is entirely possible that your students will leave believing they have failed. This shouldn't happen, especially in an environment like U.Penn. where essentially none of the students are in danger of "failing"! Just by making it into the school, they should have an overwhelming feeling of success.
The relative-ness of failure is important, because it is the first step in learning helplessness. Seligman has repeatedly shown in studies that any failure induces helplessness for a brief period of time. It is the permanent nature of these failures over time and a person's belief that they can't control it that leads to full on "learned helplessness."
Assess Improvement, Not Absolute
I think this makes a strong case that teachers should take measures to insure that all their students feel leaving successful. If this means that grades are the leading cause of "learned helplessness" in school, then it's time to find another way of assessing students. After all, it should be entirely about relative improvement within a single student that determines success anyway, not some arbitrary grading rubric or class standing.