Investors and forecasters often extrapolate from past returns, but whether this reffects behavioral bias or efficient information processing remains unclear. We address this questionby inferring Chinese mutual fund managers’ market expectations from textual analysis oftheir commentaries and linking them to portfolio choices and performance. Extrapola-tion is state-dependent: it is stronger when growth is above trend and idiosyncratic riskis relatively more important. It is associated with weaker market timing and strongerstock picking, leaving overall performance unchanged. Our findings support a rational-inattention model of expectation formation, in which managers shift scarce attentionbetween aggregate and stock-speciffc information as the relative importance of differentrisks change.