Extrapolation

Extrapolation is the tendency to estimate the future based on the assumption that current trends will continue—or even accelerate. Reality is rarely as extreme as what we may imagine, so extrapolating can result in some silly investment decisions. Consider the following example:

• In 1977, at the time of Elvis Presley’s death, there were 170 Elvis impersonators worldwide.
• In 2000, there were 85,000 Elvis impersonators. 
• At this rate of growth, statisticians predicted that by 2019, Elvis impersonators would make up 1/3 of the world’s population.

Falling victim to extrapolation in the context of investing can be dangerous. When the market is rising, for example, extrapolation can lead us to falsely believe that we will have enough to retire much sooner than is realistic.