Penalty Functions

Penalty functions are mathematical terms added to an objective function to discourage certain behaviors in a model, such as high complexity. In trading, they are used to penalize large coefficients or excessive reliance on specific features.

By controlling the strength of the penalty, a developer can dictate the trade-off between model bias and variance. This is the core mechanism behind regularization and is essential for preventing the model from becoming too specialized.

It forces the model to prioritize simpler, more generalizable patterns.