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A formal framework of instance-based prediction is presented in which the generalization beyond experience is founded on the concepts of similarity and possibility. The underlying extrapolation principle is formalized within the framework of fuzzy rules. Thus, instance-based reasoning can be realized as fuzzy set-based approximate reasoning. More precisely, our model makes use of so-called possibility rules. These rules establish a relation between the concepts of similarity and possibility, which takes the uncertain character of similarity-based inference into account: inductive inference is possibilistic in the sense that predictions take the form of possibility distributions on the set of outcomes, rather than precise (deterministic) estimations. The basic model is extended by means of fuzzy set-based modeling techniques. This extension provides the basis for incorporating domain-specific (expert) knowledge. Thus, our approach favors a view of instance-based reasoning according to which the user interacts closely with the system