Understanding Type I and Type II Error in context of Finance

 Absolutely! Let's use a finance-related example to explain:

 Context: A Company’s New Investment Strategy

Let’s say a company is testing a new investment strategy and wants to know if it gives better returns than the current strategy.

 Null Hypothesis (H₀):

“The new investment strategy gives no better return than the old strategy.”

 Two possible mistakes explained in finance terms:

1 Rejecting a True Null Hypothesis (Type I Error)

📌 You conclude:

“The new strategy gives better returns.”

📉 But in reality:

The new strategy is not better.

🔴 What happens?
You switch to the new strategy thinking it’s better, but actually lose money or perform worse.

💼 Financial impact: Wasted resources, opportunity loss, maybe even real monetary loss.

2  Failing to Reject a False Null Hypothesis (Type II Error)

📌 You conclude:

“The new strategy is not better, so we won’t use it.”

📈 But in reality:

The new strategy actually is better.

🔴 What happens?
You miss the opportunity to earn higher returns because you stuck to the old method.

💼 Financial impact: Missed profits and competitive advantage.

📊 Summary in a Financial Context:

Scenario	What You Conclude	Actual Reality	Error Type	Financial Impact
You think the strategy works, but it doesn't	Switch to new strategy	No improvement (null is true)	Type I Error	Possible losses or poor performance
You think the strategy doesn’t work, but it does	Keep old strategy	New one is better (null is false)	Type II Error	Missed profit opportunity