Manager continuation policy (MCP) analysis

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broadex

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Type I and Type II errors resulting in incorrect firing or hiring of managers. Any idea of an easy way to remember which is which??? I feel like shooting in the dark!
 
Don’t shoot, not yet my friend
T-I : You have a view about the alpha return of a manager. So you start with the hypothesis H:Alpha=0 vs. H:Alpha not equal to 0. After running all tests (T-test), you conclude that H:Alpha not equal to 0 is correct and the manager did generate some excess return when in reality he was pure lucky! So you gave the manager a raise and a promotion. You committed T-I error.
T-II : Taking the above example, the manager actually generated positive alpha, but you failed to recognised that and held the view the Manager was pure lucky. You denied the Manager her due bonus and possibly fired her !!!!!!!. You committed T-II error as you failed to reject the null hypothesis, H:alpha=0.
 
Thanks. But i cant see whats your Ho and H1. What are the null and alternative hypotheses? I thought this is the tricky part (i always struggle with this)….and im sure after nailing this the rest is derivation material!
 
The null hypothesis H0 is that managers are useless: they add no value.
The alternative hypothesis Ha is that managers add value.
A Type I error is rejecting a true null hypothesis: keeping useless managers.
A Type II error is failing to reject a false null hypothesis: giving the boot to managers who add value.
 
CFAI always find sneaky ways to add terrible level 1 quant stuff into topics that don’t need quant at all!
 
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