What is a type 2 error in manager evaluation?

A type 2 error in manager evaluation refers to the failure to recognize the effectiveness of a manager who is actually adding value. This means that if you decide not to retain a manager who is performing well—one who has a positive impact on the organization—you are committing a type 2 error.

In the context of hypothesis testing, the null hypothesis often represents a baseline assumption, such as a manager having no effect on performance. A type 1 error would involve incorrectly rejecting this null hypothesis when it is false, while a type 2 error occurs when the null is accepted when it should be rejected. In practical terms, rejecting a capable manager demonstrates an oversight in recognizing value-added by their leadership, which aligns with the example given.

This understanding emphasizes the importance of accurately assessing managerial performance to ensure that valuable leadership is not overlooked, which is critical in investment management and fund performance evaluations.