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You’ve been tasked with building a classification machine-learning model to predict whether a transaction is either fraud or not fraud for a credit card company. You have ten years of historical data on transactions, including a flag for whether a transaction was manually identified as fraud.

Describe how you might go about building a fraud detection model for credit card transactions. Be sure to mention the possible model types, discuss the bias-variance tradeoff in model development, and address any complexities that arise from the class imbalance.

Input features in the data include:

<ul>
<li>Transaction amount</li>
<li>Merchant category for the transaction</li>
<li>Zip code for the merchant</li>
<li>Zip code for the billing address</li>
<li>Average transaction amount for the account over the past six months</li>
</ul>

Output feature:

<ul>
<li>0/1 flag for fraud (0 = not fraud, 1 = fraud)</li>
</ul>

Note: Fraudulent transactions are (thankfully) a very small percentage of all historical transactions. Assume fraudulent transactions are 0.01% of historical data.While building the model to perform the classification, you need to consider the bias/variance tradeoff, and take into account the fact that there is a class imbalance (very few of the observations are “fraud”).

Bias variance tradeoff and class imbalance in finance

Bias - Variance Tradeoff and Class Imbalance in Finance

Suppose there exists a new airline named Jetco that flies domestically across North America. Jetco recently had a study commissioned that tested the boarding time of every airline, and it came out that Jetco had the fastest average boarding times of any airline.

What factors could have biased this result, and what would you look into?

What could potentially bias the average boarding time in favor of an airline that only flies domestically?

What could potentially bias the average boarding time in favor of an airline that only flies domestically?

Boarding Times Bias

A new airline came out as the fastest average boarding times compared to other airlines.  What factors could have biased this result and what would you look into?

You are testing hundreds of hypotheses with many t-tests. What considerations should be made?

What is a key disadvantage of the F-test when compared to multiple t-tests?

What is a key disadvantage of the F-test when compared to multiple t-tests?

Hundreds of Hypotheses

You are testing hundreds of hypotheses with many t-tests. What considerations should be made?

Question	Topic	Difficulty	Ask Chance
Bias - Variance Tradeoff and Class Imbalance in Finance	Machine Learning	Medium	Very High
Boarding Times Bias	Statistics	Medium	Very High
Hundreds of Hypotheses	Statistics	Medium	Very High

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