This filter is used to change which post field or custom field is used for the option value attribute of auto-populated select fields. For more information see this doc.
https://calderaforms.com/doc/select-options/
Where Does This Code Go?
When using WordPress hooks to customize Caldera Forms or other plugins you should not modify the plugin files, or you will lose your changes when you update the plugin. Instead you should create a small plugin to hold the custom code. It's easy, learn how here.
Technically you can add the custom code to your theme's functions.php, but then you will not be able to change your theme and keep these customizations.