Why does relaxing the appraisal criteria for evaluating managers result in an increase in Type I errors?
type I error - you are failing to remove a manager who does not perform. (keeping a manager who does not add value).
obviously by relaxing appraisal criteria - you are aiding in the increase in Type I.
Type I error akin to beer goggles or the 1AM ‘relaxing’ of your standards while trying to pick-up a mate for a night cap
Isn’t relaxing the criteria = widening the confidence band (as in example 15 on p176)?;lk
Sorry, look at p187, second to last paragraph.
instead of looking at bands and the stuff - it is making it easier for the manager to survive even if he performed poorly.
what about Pg 187? they are saying - yes it is preferable to perform the Type I error and keep a non-performing manager - since it is costlier to do the Type II error and get rid of a manager that may be performing.
That is what I understood:
Due to the high costs and uncertain benefits of replacing managers, it would seem advisable for fund sponsors to develop manager evaluation procedures that are tolerant toward Type I errors in order to reduce the probability of Type II errors. That is, it may be preferable to endure the discomfort of keeping several unskillful managers to avoid the expense of firing a truly superior manager. However, there is no right answer to this dilemma, and fund sponsors must undertake their own cost–benefit analyses,
End Quote from book
Actually, it was the precedeing paragraph on p187 I was referring to.
Nevertheless, I understand now the error in my thinking. Relaxing the appraisal criteria makes it easier for nonperforming managers to survive (a Type I error), not the other way around. On the exam, I actually answered C, both types of errors, thinking that “relaxing” meant performing less due dilligence.
However, the fact that it took me so long to really understand what was being asked kind of worries me. Oh well!