Definition of Overfitting

Overfitting  is a modeling error which occurs when a function is carefully fit to a restricted set of information points.

Brief Explanation of Overfitting

Overfitting the design generally takes the form of making an extremely complicated design to describe idiosyncrasies in the information under research. Actually, the information being analyzed often has some degree of mistake or unique disturbance within it. Thus making the design adjust too carefully to a little bit incorrect information can contaminate the design with significant mistakes and reduce its predictive power.

Financial professionals must always be aware of the risks of Overfitting a design based on restricted information. For example, a very prevalent problem is using computer methods to search comprehensive data source of traditional industry information to find styles. Given enough research, it is often possible to build up intricate theorems which appear to estimate things such as profits in the stock industry with close precision. However, when used to information outside of the example, such theorems may likely turn out to be merely an Overfitting of a design to what were in truth just chance situations. In all cases, it is important to test a design against information which is outside of the example used to build up to it.