Distinguish Type I from Type II errors when deciding whether to hire or keep a manager

Take as the null hypothesis that the manager has no skill. A Type I error rejects a true null: hiring a manager who lacks skill, or keeping one on. A Type II error fails to reject a false null: passing over a skilled manager, or firing one after a run of poor results. Because the return distributions of skilled and unskilled managers overlap heavily over short periods, reducing one error tends to increase the other; only longer records or better qualitative evidence reduce both. Type I errors are visible, whereas Type II errors are an unseen opportunity cost, so committees tend to fear the former more. Firing managers after brief underperformance also incurs transition costs and often locks in Type II errors.