Loss and set-back are part of dramatic storytelling. Gamasutra has a piece exploring how gamers can experience these concepts without feeling like they've done something wrong. Obvious examples of confusion caused by games trying to be dramatic with loss are any early boss fight you are expected to lose in Final Fantasy (although that's become cliché), the last scene in Shadow of the Colossus, the case file appointment system in Dead Rising, or any other time you were two seconds away from hitting the reset button because you didn't realize you were supposed to lose.
The article brushes over numerous concepts which can be summed up most easily to any geek as: How do you make gamers experience a Kobayashi Maru scenario and enjoy it? The article says what needs to happen is "the creation of a language of game drama ... a set of established conventions that will allow the player to read a setback as good storytelling, and not a slip-up on their part. A grammar of subtle cues to create the distinction." The language will take a while to develop, the first part being to wean gamers off constant positive reinforcement, then introducing setbacks, "thus opening the door to more nuanced and authentic dramatic experience." How will gamers know that we've reached this place described in the article? It looks like the answer is when gamers enjoy the loss and don't go reaching for the reset button or accessing their last save file.