Training Data Vs. Test Data

Question

This might sound like an elementary question but I am having a major confusion regarding Training Set and Test.

When we use Supervised learning techniques such as Classification to predict something a common practice is to split the dataset into two parts training and test set. The training set will have a predictor variable, we train the model on the dataset and "predict" things.

Let's take an example. We are going to predict loan defaulters in a bank and we have the German credit data set where we are predicting defaulters and non- defaulters but there is already a definition column which says whether a customer is a defaulter or Non-defaulter.

I understand the logic of prediction on UNSEEN data, like the Titanic survival data but what is the point of prediction where a class is already mentioned, such as German credit lending data.

Answer 1

As you said, the idea is to come up a model that you can predict UNSEEN data. The test data is only used to measure the performance of your model created through training data. You want to make sure the model you comes up does not "overfit" your training data. That's why the testing data is important. Eventually, you will use the model to predict whether a new loaner is going to default or not, thus making a business decision whether to approve the loan application.

Answer 2

The reason why they include the defaulted values is so that you can verify that the model is working as expected and predicting the correct results. Without which there is no way for anyone to be confident that their model is working as expected.

Answer 3

The ultimate purpose of training a model is to apply it to what you call UNSEEN data.

Even in your German credit lending example, at the end of the day you will have a trained model that you could use to predict if new - unseen - credit applications will default or not. And you should be able to use it in the future for any new credit application, as long as you are able to represent the new credit data in the same format you used to train your model.

On the other hand, the test set is just a formalism used to estimate how good the model is. You cannot know for sure how accurate your model it is going to be with future credit applications, but what you can do is to save a small part of your training data, and use it only to check the model's performance after it has been built. That's what you would call the test set (or more precisely, a validation set).