05.07.1
Chapter 05.06
Extrapolation is a Bad Idea
After reading this chapter, you should be able to:
1. understand why using extrapolation can be a bad idea.
Example
(Due to certain reasons, this student wishes to remain anonymous.)
This takes place in Summer Session B – July 2001
Student: “Hey, Dr. Kaw! Look at this cool new cell phone I just got!”
Kaw: “That’s nice. It better not ring in my class or it’s mine.”
Student: “What would you think about getting stock in this company?”
Kaw: “What company is that?”
Student: “WorldCom! They’re the world’s leading global data and internet company.”
Kaw: “So?”
Student: “They’ve just closed the deal today to merge with Intermedia Communications,
based right here in Tampa!”
Kaw: “Yeah, and …?”
Student: “The stock’s booming! It’s at $14.11 per share and promised to go only one way—
up! We’ll be millionaires if we invest now!”
Kaw: “You might not want to assume their stock will keep rising … besides, I’m skeptical of
their success. I don’t want you putting yourself in financial ‘jeopardy!’ over some silly
extrapolation. Take a look at these NASDAQ composite numbers (Table 1)”
Student: “That’s only up to two years ago …”
Kaw: “That’s right. Looking at this data, don’t you think you should’ve invested back
then?”
Student: “Well, didn’t the composite drop after that?”
Kaw: “Right again, but look what you would’ve hoped for if you had depended on that trend
continuing (Figure 1).”
Student: “So you’re saying that …?”
Kaw: “You should seldom depend on extrapolation as a source of approximation! Just take
a look at how wrong you would have been (Table 2).”
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