Ambiguity aversion

What is ambiguity aversion?

Ambiguity aversion is a preference for options with better-known probabilities over otherwise comparable options with less-known probabilities. It differs from risk aversion, which concerns preferences over outcomes when probabilities are specified. “Uncertainty aversion” is sometimes used for the same idea, though uncertainty can also be used more broadly.

This page focuses on the preference. The related ambiguity effect describes a choice pattern that the preference can help explain.

Ellsberg’s example

Ellsberg (1961) described choices between urns with known and unknown color proportions. Consider two urns, each holding 100 red or black balls. One has 50 of each; the other has an unknown mix. In separate choices, you select an urn for a bet paying $100 if the drawn ball matches the specified color and $0 otherwise.

Preferring the known urn when red wins and again when black wins creates the puzzle. Under the model being tested, those choices would require both colors in the unknown urn to have probabilities below 50%, even though red and black exhaust the possibilities. Preferring the known urn for red alone could simply reflect a belief that the other urn contains fewer red balls.

What the preference does—and does not—show

Ellsberg reported variation in people’s choices, so ambiguity aversion is a tendency, not a rule everyone follows. In a real decision, ask what is known about each option. If the probabilities are unknown, you cannot simply declare that the rejected option had the higher expected value. Familiar investments, for example, can differ from unfamiliar ones in information, access, and cost as well as ambiguity.