A credit card company wants to identify fraudulent transactions in real time.

The solution that the data scientist should use to improve the performance of the model is to apply the Synthetic Minority Oversampling Technique (SMOTE) on the minority class in the training dataset, and retrain the model with the updated training data. This solution can address the problem of class imbalance in the dataset, which can affect the model’s ability to learn from the rare but important positive class (fraud).

Class imbalance is a common issue in machine learning, especially for classification tasks. It occurs when one class (usually the positive or target class) is significantly underrepresented in the dataset compared to the other class (usually the negative or non-target class). For example, in the credit card fraud detection problem, the positive class (fraud) is much less frequent than the negative class (fair transactions). This can cause the model to be biased towards the majority class, and fail to capture the characteristics and patterns of the minority class. As a result, the model may have a high overall accuracy, but a low recall or true positive rate for the minority class, which means it misses many fraudulent transactions.

SMOTE is a technique that can help mitigate the class imbalance problem by generating synthetic samples for the minority class. SMOTE works by finding the k-nearest neighbors of each minority class instance, and randomly creating new instances along the line segments connecting them. This way, SMOTE can increase the number and diversity of the minority class instances, without duplicating or losing any information. By applying SMOTE on the minority class in the training dataset, the data scientist can balance the classes and improve the model’s performance on the positive class1.

The other options are either ineffective or counterproductive. Applying SMOTE on the majority class would not balance the classes, but increase the imbalance and the size of the dataset. Undersampling the minority class would reduce the number of instances available for the model to learn from, and potentially lose some important information. Oversampling the majority class would also increase the imbalance and the size of the dataset, and introduce redundancy and overfitting.

1: SMOTE for Imbalanced Classification with Python - Machine Learning Mastery