From Karst Peaks to High‑Dimensional Finance: Lessons on Over‑fitting and Regularisation

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From Karst Peaks to High‑Dimensional Finance: Lessons on Over‑fitting and Regularisation

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The spectacular rock formations of China illustrate how natural forces shape complexity over millions of years. In quantitative finance, similar forces—data, models, and inference—sculpt our predictions, and the same geological principles of erosion and stability can guide the design of high‑dimensional machine‑learning systems. The Parallel Between Landscape Evolution and Model Building Just as wind and water gradually wear down towering cliffs, adding more predictors to a regression model can erode the gap between fitted values and observed data. In‑sample error shrinks because the model has more “tools” to capture every nuance, but the same flexibility makes the model vulnerable to the unseen “storms” of out‑of‑sample data....

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