Folks,

Gone on a bit of a mad one this week, looking at risk, precision, and recall. 

Not my area of expertise by any stretch. I wanted to know the impact of the different types of errors on decision-making.

First up, here’s some context: My structural editor, B, has signed off on my book content; it’s time to apply the polish. Only, it turns out polish is not cheap. 

Here are two outcomes for you: 

• The "Positive" Outcome: You sell enough books to make a profit.
• The "Negative" Outcome: The book does not sell, and you lose the £3,000.

Now, if we look at the average outcome, which is a smart move when you are taking a look at how to ground yourself, we know the average author sells 250 books. 

If you sell a book at £9.99, you can expect a £5 profit. Not great news if your operating costs are £3,000 ( 250 x £5 = £1,250).

Knowing what the average author sells is useful, but not helpful, since it is likely that in a room full of authors, one author will have outsold all the other authors put together. We need to be a little more cautious about our prediction. 

Let’s take a look at the possible errors: 

Type I Error (False Positive): You predict the book will be profitable when it won't be

• You spend £3,000 on polish and lose money
• This is your main downside risk

Type II Error (False Negative): You predict the book won't be profitable when it would be

• You don't polish/publish and miss out on potential profit
• Opportunity cost varies depending on how much you actually would have made

The asymmetry is crucial here. Our Type I error has a fixed, known cost (£3,000 loss), while our Type II error cost depends on the unknown upside.

The question is, what would you do? Which error are you going to accept?

I find this interesting – in a world where we are after perfection, it’s humbling to know even simple low low-key decisions like this contain error. 

What did I do? 

I can’t tell you! You’ll have to wait and see 🙂

Have a great week.

Simon

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