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Financial Machine Learning / Learning Theory and Generalisation

The Bias-Variance Decomposition for Squared-Error Loss

Topic 1's closing lesson introduced underfitting and overfitting informally, through a picture: a straight line failing to capture curvature, and a wiggly high-degree polynomial chasing noise. This note gives that picture a name and a precise mathematical decomposition — bias and variance are not vague intuitions but two distinct, additive contributors to expected test error, and understanding which one dominates a given model's failure is the single most useful diagnostic in this entire unit.

In this lesson

  1. Learning objectives
  2. Generalisation error, formalised
  3. Bias and variance, defined
  4. The trade-off and the U-shaped curve
  5. Worked example

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