The vignette says: Clark also asks Lancaster about the strict appraisal criteria used to evaluate the different managers employed by the Fund. Lancaster states, “The Fund is willing to risk firing good managers, a Type II error, in order to prevent retaining poor managers, a Type I error. But I would prefer if the Fund would relax the appraisal criteria.”
Q: If the Fund adopted Lancaster’s preferred appraisal criteria, the most likely impact would be an increase in: A. Type I error only. B. Type II error only. C. both types of errors.
Could anyone clearify why A is correct even I know that reduces appraisals mean lower standard deviation which lead to wider confidence interval (Lower level of significance. Aka alpha which type 1 error ) type error II is 1 - type 1 error )
Conceptionally, relaxing the criteria means keeping more managers while firing less, so you are more likely to keep bad ones (Type I error increases) and less likely to fire good ones (Type II error decreases).