Simple Review of Extrapolation Bias

Abstract

Extrapolation bias is a popular topic recently in economics and finance. Many researchers have become interested in this bias because it can explain many anomalies that a rational model cannot. This paper is a simple review of extrapolation bias, including its definition and bias. After reviewing past research on extrapolation, this paper selects a comprehensible definition, and three applications that can represent the recent research on extrapolation: the investor behavior model, the bubble model, and the house price model from three different top papers. After the review, it can be concluded that extrapolation bias has a wide applied range especially, in the financial market and asset pricing, and can explain many financial anomalies.