Overfitting
Quantitative Finance glossary · Probability, Statistics & Linear Algebra
Definition
Fitting a model so closely to training data that it captures noise rather than signal; reduces out-of-sample performance.
Overfitting in plain English
Overfitting is when a model memorizes the practice data instead of learning the real pattern, so it looks brilliant on stuff it has seen and falls apart on anything new. Real data always mixes a true signal with random noise, and a model that's too flexible will bend itself to fit the noise too, mistaking random flukes for rules. It's like a student who memorizes the exact answers to last year's exam word-for-word: perfect on that test, lost the moment the questions change. The whole game in machine learning is capturing the signal while ignoring the noise.
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