What is extrapolation bias?

The human mind is skilled at recognizing patterns and applying inductive reasoning to predict events with consistent natural laws.

We think that a company that has been growing quickly will continue to grow at the same speed, that the level of profitability of a business will remain constant and that a stock that has been rising should continue its trajectory.

However, this method is inadequate for predicting business complexity due to the variables involved.

Despite this, we tend to use this extrapolation bias, assuming that past trends will continue. This bias does not necessarily lead to wrong conclusions, but its unreliability demands more comprehensive analyzes to avoid costly investment mistakes.

Counterbalancing bias involves deeper analysis of the factors underlying past results. Even with all due diligence, predicting the future will always be a difficult task. It is important to remain aware that not all uncertainty can be reduced with more analysis.

There are factors that will always be unpredictable and the best approach is to treat them as unknowns, remaining aware of the risk they represent for the investment.