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:
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.