AMBIGUITY AVERSION

Ambiguity

Let’s start with a thought experiment, quickly. Visualize two boxes.

In box A there are 50 red balls and 50 black balls (100 in total). In Box B there are 100 balls, however, the % of red balls vs black balls is unknown (but assume that every ratio is as likely as the other). I want you to pick a red ball (with your eyes closed, of course) from either Box A or Box B. Which box will you pick from?

This thought experiment is a modified version of the Ellsberg Paradox experiment carried out in the 60s, a classic evidence for ambiguity aversion.

You see, if you from pick Box A. You might just be human after all. Research has shown (incessantly) an overwhelming choice of box A. We have a preference for risk (probability known) over uncertainty (probability unknown). In this context, a preference for Box A over Box B. That’s how we are ‘wired’ evolutionary.

So, what makes this a paradox? Without getting into the esoteric probabilistic jargons, here is why:

The probability that you pick a red ball from Box A is 0.5 (1/2) right? Good. Straight forward

How about box B? You see … The key word is, every ratio is as likely as the other.

And this simply means the following combinations are possible for box B:

1red balls and 99 black balls is as likely as 2 red balls and 98 black balls;

2red balls and 98black balls is as likely as 3 red balls and 97 black balls

                             

98red balls and 2black balls is as likely 99red balls and 1 black balls

… blah blah blah (you get the point)

With this simple analysis it’s obvious that the probability of picking a red ball in both boxes is identical (i.e 0.5) as such, we should pick from box A as often as from box B, but that does not happen in reality.

We continually pick from box A because we are averse to ambiguity. A literary interpretation will be “Better the devil you know than the devil you don’t know”.

Scientists have identified the portion of the brain that allow for this bias, it’s the lizard brain (for clarity it’s the portion of your brain you share with lizards) Imbued with fear, picking from box A can’t be easier.

This explains why we settle for less and aim low. Think about it: we are literally giving up a chance of picking a red ball from a box B that looks like this {100 red balls; 0 black balls} for box A with just 50 red balls. It’s probably the fastest way to be a sucker. (Sucker’s box will therefore be a perfect memento for box A)

And we all do this:

Each time you decide to stick to your low-paying-boring job instead of starting the business you had constantly dreamt about, you are picking from the sucker’s box.

Biases are at the core of humanity, and recognizing various biases (and managing to escape it) leads the path to a better decision. Ambiguity aversion is a cognitive bias, that is of course heuristic driven.

(To save you the psychological ‘rendition’), just remember, the next time you are settling for less: you are picking from the sucker’s box.

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