Ambiguity Aversion

We prefer a known risk to an unknown uncertainty — even when the expected value of the uncertain option is identical or better. We fear the unknown more than bad odds we can calculate.

• In Ellsberg's paradox, people prefer drawing from a bag with a known 50/50 split of red and black balls over an identical bag with an unknown composition — even though the expected value is the same.
• Investors strongly prefer familiar domestic stocks over equally performing foreign stocks — the unknown feels riskier.
• Managers choose a certain small loss over an ambiguous range of outcomes — even when the ambiguous option is statistically better.