Why do we prefer options we know?

The

Ambiguity Effect

, explained.

Bias

What is the Ambiguity Effect?

The ambiguity effect describes how we tend to avoid options that we consider to be ambiguous or missing information. We dislike uncertainty and are therefore more inclined to select an option where the probability of achieving a favorable outcome is known.

A cartoon comparing investment options. On the left, a graph with fluctuating red lines represents stocks, showing potential for either multiple money bags or a single smaller one. On the right, a steadier graph labeled 'Bank' shows a figure saying 'Safe is better!' with consistent, smaller money bags beneath.

Where this bias occurs

Imagine that you’re in the midst of college course registration. You’re planning on taking one elective course and have a few options to consider. In order to better inform your decision, you decide to search online for reviews of the professors who will be teaching your top two picks. Suppose that one of the professors has an average rating, while the other has no ratings yet since this is their first semester teaching at your school.

In this scenario, most people tend to select the course taught by the professor with the average rating. Despite the fact that their reviews aren’t so great, we feel better knowing exactly what we’re getting ourselves into. We’re scared to risk taking a course with a professor who we know nothing about, on the off chance that they turn out to be a bad teacher. However, by playing it safe, we risk missing out on a phenomenal course taught by an excellent teacher. When making decisions like these, we often forget to give equal weight to the possibility that the result of taking a risk could actually be positive.

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Sources

Frisch, D., & Baron, J. (1988). Ambiguity and rationality. Journal of Behavioral Decision Making, 1(3), 149–157. https://doi.org/10.1002/bdm.3960010303
Borghans, L, Golsteyn, B.H.H., Heckman, J.J., and Meijers, H. (2009). GENDER DIFFERENCES IN RISK AVERSION AND AMBIGUITY AVERSION. Journal of the European Economic Association. 7(2-3), 649-658.
Ellsberg, D. (1961). Risk, ambiguity, and the savage axioms. The Quarterly Journal of Economics. 75(4), 643–669.
Howard, J. (2018). Ambiguity Effect. Cognitive Errors and Diagnostic Mistakes: A Case-Based Guide to Critical Thinking in Medicine. 15-19. doi: 10.1007/978-3-319-93224-8_2
Muthukrishnan, A. V., Wathieu, L., & Xu, A. J. (2009). Ambiguity aversion and the preference for established brands. Management Science, 55(12), 1933–1941. https://doi.org/10.1287/mnsc.1090.1087
Ahrends, C., Bravo, F., Kringelbach, M. L., Vuust, P., & Rohrmeier, M. A. (2019). Pessimistic outcome expectancy does not explain ambiguity aversion in decision-making under uncertainty. Scientific Reports, 9(1), 1-11. https://doi.org/10.1038/s41598-019-48707-y
Antoniou, C., Harris, R. D., & Zhang, R. (2015). Ambiguity aversion and stock market participation: An empirical analysis. Journal of Banking & Finance, 58, 57-70. https://doi.org/10.1016/j.jbankfin.2015.04.009
Anantanasuwong, K., Kouwenberg, R., Mitchell, O. S., & et al. (2024). Ambiguity attitudes for real-world sources: Field evidence from a large sample of investors. Experimental Economics, 27(3), 548–581. https://doi.org/10.1007/s10683-024-09825-1
Kovářík, J., & Levin, D. (2024). Counting pros and cons in decisions under ambiguity. SSRN. https://doi.org/10.2139/ssrn.4808470
Gerrard, P., Barton Cunningham, J., & Devlin, J. F. (2006). Why consumers are not using internet banking: A qualitative study. Journal of Services Marketing, 20(3), 160-168. https://doi.org/10.1108/08876040610665616

About the Authors

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Dan Pilat

Dan is a Co-Founder and Managing Director at The Decision Lab. He is a bestselling author of Intention - a book he wrote with Wiley on the mindful application of behavioral science in organizations. Dan has a background in organizational decision making, with a BComm in Decision & Information Systems from McGill University. He has worked on enterprise-level behavioral architecture at TD Securities and BMO Capital Markets, where he advised management on the implementation of systems processing billions of dollars per week. Driven by an appetite for the latest in technology, Dan created a course on business intelligence and lectured at McGill University, and has applied behavioral science to topics such as augmented and virtual reality.

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Dr. Sekoul Krastev

Sekoul is a Co-Founder and Managing Director at The Decision Lab. He is a bestselling author of Intention - a book he wrote with Wiley on the mindful application of behavioral science in organizations. A decision scientist with a PhD in Decision Neuroscience from McGill University, Sekoul's work has been featured in peer-reviewed journals and has been presented at conferences around the world. Sekoul previously advised management on innovation and engagement strategy at The Boston Consulting Group as well as on online media strategy at Google. He has a deep interest in the applications of behavioral science to new technology and has published on these topics in places such as the Huffington Post and Strategy & Business.

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