Extrapolation is an act or instance if inferring an unknown from something that is known. For instance, we are 60 miles from a huge cliff, speeding across the desert at 60 miles per hour.
Extrapolate that and we will all over the cliff and die in 60 minutes. Sure, that could happen, but it really is an instance of the extrapolation error and a failure to consider all the possible outcomesof the situation. That requires System 2 thinking (not automatic or rule-of-thumb thinking). Many things could happen with our doomed car: It could slow down, break down, or turn around or stop!
The unaware investor is the great extrapolator. If the market has been going steadily up, it “feels” like it will continue. As an advisor I’ve heard people say, “I had $200,000 in, vested and now it is $400,000. In twelve years, I should have 2.4 million! Bad thought.
When the market is trending down, my $1 million became $800,000!! At this rate I will be broke in 4-5 years!! (do clothe tearing, gut wrenching, and hand wringing now!) We think these thoughts all the time and need to be aware how harmful they can be.
Even Scientist fall prey to embarrassing extrapolation errors. extrapolation gave us acid rain and the hole in the ozone. It also caused a 15-year panic when Dr. Paul Ehrlich went on Johnny Carson 14 times hyping overpopulation his bestselling book, The Population Bomb. He predicted we would all starve to death by 1985! As an 8th grader he had me worried! It was our Global Warming.
Many discredited scientific “facts” were extrapolated and many of them continue to be believed. We see it now in the old “over population” and global warming. Both can only be perpetuated by extrapolation.
Next Time,
“The Bandwagon Fallacy”
Craig