Society of Actuaries (SOA) PA Practice Exam

What is the formula to calculate the error rate in a classification model?

1. (TP + TN) / N

2. (FP + FN) / N

3. 1 - (TP + TN) / N

4. (TP + FP) / N

The correct answer is: (FP + FN) / N

The error rate in a classification model reflects the proportion of incorrect predictions made by the model compared to the total number of predictions. The formula to calculate this is based on the concept of false positives (FP) and false negatives (FN), which directly contribute to the errors in the model. The error rate is calculated as the sum of false positives and false negatives divided by the total number of observations (N). False positives are instances where the model incorrectly predicts the positive class (predicting an outcome is present when it is not), while false negatives are cases where the model fails to predict the positive outcome when it actually exists. Thus, the formula effectively counts all the instances where the model makes incorrect classifications. This approach provides a clear measure of how often the classification model fails to make the correct prediction, which is crucial for understanding its performance and guiding improvements.