Extrapolation Bias

Extrapolation bias is the tendency to believe that recent trends will continue into the future, without accounting for the reasons that might cause them to reverse, such as profit-taking, market saturation, competition, or simple regression to the mean.

NoteExample

The doubling stock

An example is that of a stock doubling its value within a year, and assuming the trend will continue; however, in reality, if investors stop buying or early investors take profits, its value will just drop.

“This stock is a sure win, look at its last 6-months performance”.

Also relates to: Hot Hand Fallacy · Gambler’s Fallacy · Overconfidence · Excessive Optimism · Information Cascades