The Dangers of Ruthless Extrapolation in Business

Recognizing patterns was helpful for our ancestors. They could make decisions based on seasonal cues or changes in food supply.

But today, we often extrapolate too much.

In his article “Ruthless Extrapolation,” professor of physics Tom Murphy demonstrates this with an extrapolation of transatlantic crossing times:

Extrapolate the progress of the aeronautical age to 2012, and we should expect [the] crossing time to now be 19 minutes. By 2050 it would take a cool 2 minutes, and our crossing would exceed the speed of light by the year 2200. Another big oops. Not only did we saturate at 3 hours with the Concorde, we don’t achieve even that anymore!

Extrapolation can lead to grave mistakes.

If our business has been going well, we’re optimistic about the future. But this confidence may lead to complacency and a nasty surprise when the trend (inevitably) breaks.

This also goes the other way. When our business struggles, it doesn’t always mean we’re destined for failure.

Extrapolation may also mess with our efforts to get more with less.

An online school owner with 200 students at $200/month each assumes that increasing the price to $400/month halves the number of clients.

But it’s a shortsighted extrapolation.

People willing to pay $400/month may not buy it for $200. If you want to go to Harvard, you aren’t in the market for DeVry University (ranked one of the worst schools in the US) however cheap it may be.

A higher price often appeals to clients of higher quality. This means less work for a more fulfilling experience of serving them.

Your competitors may all extrapolate from past data. This means a wide open market full of eager clients for a missing solution.

Avoid ruthless extrapolation. The modern world is too complex and dynamic for that.

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