How Should You Discount Your Backtest PnL?

In‐sample overfitting is a drawback of any backtest‐based investment strategy. It is thus of paramount importance to have an understanding of why and how the in‐sample overfitting occurs. In this article we propose a simple framework that allows one to model and quantify in‐sample PnL overfitting. This allows us to compute the factor appropriate for discounting PnLs of in‐sample investment strategies.