Ambiguity

A term used by decision and game theorists in the context of certain kinds of decisions being made under uncertainty which from the perspective of subjective utility theory is a kind of bias in the human psyche. Suppose there are two urns, each containing a hundred balls, which are either red or black. One urn has fifty red and fifty black balls. The proportion of red and black in the other urn is unknown. You can draw one ball from one of the urns, without looking, and if you draw a red ball you win a hundred dollars. Most people

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choose the 50-50 urn, even though, if we take the view that there are insufficient reasons for discriminating between the two urns, there is no higher probability of getting a red. When offered a hundred dollars for a black ball, they also choose the 50-50 urn. They seem to be averse to the 'ambiguity' represented by the other urn and strongly prefer the apparently clear-cut. This is also known as the Ellsberg Paradox (Daniel Ellsberg, 1961, 'Risk, ambiguity, and the Savage axioms', Quarterly Journal of Economics, 75, 643-69).

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