tldr – type 1 error (aka error of commission) can have more damage to our portfolio and return over a period of time, than type 2 error (aka error of omission) since markets like life is a constant battle of reality vs perception.
if above statement confuses anyone, just replace “actual = reality” and “predicted = perception” in the image while good represents “good companies” and bad represents “bad companies”. that should clear the picture.
we have to save ourselves from ourselves, where we perceive a bad company as a good one leading to a false positive narrative aka type 1 error aka error of commission.
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