False (and Missed) Discoveries in Financial Economics

The multiple testing problem plagues many important issues in finance such as fund and factor selection. Many look good purely by luck. There are a number of statistical techniques to control for multiplicity that reduce Type I errors - but it is unknown by how much. We propose a new way to calibrate both Type I and Type II errors. We start with the researcher's prior belief on the proportion of managers that are skilled. Using a double...