One of the great problems with forecasting is the fallacy of extrapolation. Forecasters love to believe that tomorrow will be like to today and head in the same direction. Whatever is the trend today will continue tomorrow to the exclusion of other alternatives. There is over-extrapolation.

We don’t see change from the status quo. Now, this may be a good naive forecast and naive forecast have been successful in the short run versus other alternatives. In fact, forms of extrapolation are a good starting point for discussion, but it is not the end. If economic growth is increasing this quarter, it will continue next quarter. A failing economy will continue to fail. This extrapolation view generally creates overshooting with forecasts.

A fallacy of extrapolation with respect to forecasting is different, however, from trend-following albeit they are connected. Trend-following is the use of past prices to determine or measure a signal for price direction. There is an understanding that when the trend changes there will be a change in view. There is no remorse from change and there is no extrapolation beyond what the immediate forecast is. In fact, although they are, a trend-follower is unlikely to even call his decisions forecasts.

Forecast extrapolation is an inertia with not being able to see anything but current behavior as future behavior. It is a deficiency of imagination with respect to what is possible. Beating the fallacy requires more choice of alternative economic realities.