Quant Memo
Statistics/●●●●●

When false alarms are the expensive error

A trading alert reads XX. Under "no trade" (H0H_0), XNormal(0,1)X \sim \text{Normal}(0, 1); under "trade" (H1H_1), XNormal(2,1)X \sim \text{Normal}(2, 1). The two states are equally likely, π0=π1=0.5\pi_0 = \pi_1 = 0.5. Acting on a false alarm costs 88 units (a bad trade), while missing a real opportunity costs only 11 unit. You declare "trade" when X>cX > c.

Find the cost-minimizing cutoff cc.

Your answer

More Statistics questions