The notion of type 1 and type2 errors and the ensuing trade-off is equally applicable to other areas of decision-making under uncertainty. In social programmes, for example, one faces the trade-off between giving social assistance to a person who is not in need, versus turning away someone who, in fact, is destitute; while in law, the trade-off is between jailing an individual who is innocent versus leaving somebody free who is guilty.
2.
See, for example, PorterM.E., ‘Capital Choices: Changing the Way America Invests in Industry’, Journal of Applied Corporate Finance, Vol. 5, No. 2, pp. 4–16.
3.
It is interesting in this context that our entire culture as reflected, for example, in the law, education, and even religion and ethics tends to focus much more on an avoidance of bad actions and mistakes, than on encouraging positive ones (‘thou shalt not’ and ‘no’ appear to be much more prevalent than ‘thou shalt’ and ‘yes’).
4.
For an empirical study linking risk taking propensity and various socio-economic characteristics, see, for example, MacCrimmonK., and WehrungD., ‘Characteristics of Risk Taking Executives’, Management Science, Vol. 36, No. 4, pp. 422–435.
5.
To promote a greater propensity to take risks, one can also introduce results based reward structures with asymmetric, option-like payoffs, consisting of a fixed salary and a bonus for superior performance without corresponding penalties for shortfalls. Stock options fulfill this role at the most senior levels of management. They are not practical at lower levels, however, because such bonuses would have to be tied to individual performance. Also, perceptions by superiors and chances for advancement would need to reflect the same incentives.
