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Decision Making and Types of Errors

In statistics, there are two types of possible errors. They're even called Type I and Type II errors. Type I error is rejecting a proposition you should accept, the so-called false negative. Type II error is accepting a proposition you should reject, the so-called false positive.

A decision maker can minimize one type of error, but only by increasing the likelihood of the other type. This, in turn, depends on the consequences of the different errors. The judicial rule of "innocent until proven guilty" is meant to avoid Type II error, a false conviction, that could lead to unwarranted jail time for someone. This means that the court system is biased to incur Type I error, letting a number of guilty people go free.

Both types of errors can be reduced by greater efficiency, in the above example by better prosecution and evidence-gathering. But in a live managerial situation, waiting until "all the facts are in" often isn't a option. A better option may be to take your decisions and take your occasional lumps.

And sometimes the choice of one type of error over the other is a case of "fighting the last war." In the 1930s, Britain's Neville Chamberlain committed Type I error (rejecting the hypothesis that Hitler was bad and need to be stopped) because of the devastation of World War I. In the 1960s, the Vietnam War was widely seen as a Type II error (fighting an unnecessary war), because people remembered the consequences of "Munich" and also the post World II settlement with Stalin.