Ambiguity Aversion

Ambiguity aversion is a preference for known risks over unknown risks, so that a person facing a choice between two uncertain options will tend to choose the one whose odds are known even when the expected outcome is the same. The concept was introduced through the Ellsberg paradox, in which people prefer to bet on drawing from an urn holding exactly 50 red and 50 black balls rather than an urn of 100 balls whose split between red and black is unknown, even though the true odds could be identical. Ambiguity aversion is distinct from ordinary risk aversion, which involves a preference for certainty when the odds are already known, since ambiguity aversion specifically concerns situations where the probabilities themselves cannot be determined, a condition also called Knightian uncertainty. Researchers Itzhak Gilboa and David Schmeidler developed influential mathematical models of the behavior in 1989, and the concept has since been used to help explain phenomena such as incomplete contracts, stock market volatility, and lower voter turnout in uncertain elections.