"The Adventure of The Yellow Face," as the narrator mentions at the beginning of the story, is a story of the legendary Sherlock Holmes in which he over-simplifies a case, and thus his surmise fails. Since Holmes is person who is highly dependent on logic and observations to make his deduction, usually the simplest of his theories, when all the facts can be adhered to, work. He is known to make theories to suit facts, not vice-versa. His failure here is not because of a wrong guess but because he refuses to see beyond the obvious.
When the story starts, it is established the Sherlock Holmes is already a popular figure. His methods, though simple, are irrefutable. Watson reflects that Sherlock has seldom faced failure in any of his cases and when he did, it was not on the part of his deductions. It was mostly due to either an ill stroke of luck and bad timing ("The Adventure of Musgrave Ritual," "The Engineer’s Thumb," "The Five Orange Pips"), or an exceptionally witty opponent ("A Scandal in Bohemia"). Yet in these cases his theories turned out to be true, even though the villain got away.
During the time of this case, Sherlock is said to be bored, it was a time when “cases were scanty and the papers uninteresting.” Sherlock is also a person who likes to brag his knowledge by making random observations and see if people follow him. This is evident from the numerous observations and deductions he makes from the pipe, but never asks for confirmations from the owner, as if he knows his deductions to be true enough. This is a repeating pattern in all Sherlock Holmes stories and, sometimes, he patronizes people, mostly Watson, for this. He is, thus, a person who knows the power of his knowledge and as he has already worked on a number of cases of similar nature, he has developed a pessimistic attitude as he mentions to Watson later, “I am afraid that this is a bad business, Watson”
Munro is a stock character. He is fidgeting, non-observant, irritable and extremely worried, and his urgency in the case raises tension. The demand for a hundred pounds, husband’s death in fire, presence of an inhuman face, familiarity between Munro’s wife and the new tenants point to the blackmailer theory indeed. Her picture in the house, promise to secrecy, all this superimposes the theory. In fact, these observations are easy enough to be deduced by a reader. Normally, in Sherlock Holmes stories, facts are more complex and an average reader can’t form a surmise easily. Also, Holmes refuses to divulge his deductions till his theories are confirmed. Here, he’s too confident. So by proving him wrong, Doyle not only humanizes Sherlock that even a most intelligent detective can be prone to flaws, but also plays with the minds of the readers by proving a most easy deduction completely wrong. Also, as this point Doyle was trying to ‘kill’ Sherlock, so by producing a story where Sherlock’s deduction fails, he was, maybe, playing with that idea.