Human beings tend to dislike uncertainty. Many people will avoid an option that they consider to be missing information or ambiguous in nature. It is much more common for people to choose something in which a favourable outcome is more likely to occur most of the time. Imagine a scenario in which you’re debating between two different hotels that you’re thinking about staying at. One of them has mediocre reviews and the other has none at all. Most people will opt for the certainly of the mediocre reviews rather than the risk of the one with no reviews at all.
That is the ambiguity effect at play, causing people to play it safe rather than take a risk. It is possible that the stay at the other hotel might have been the best that the person had ever experienced, but because we don’t give the same amount of weight to the possibility of the result being good as bad, we will often miss out on such a scenario. In betting, this can lead to us making poor decisions when we opt for something where the outcome is more clearly defined than when we’re not really sure what is going to happen.
The Ambiguity Effect Explained
People are inclined to avoid situations in which the outcome is uncertain, even if the uncertain outcome is the best available option. A choice that has a known outcome is more likely to be chosen, even if it isn’t the best choice that someone could make. In 1961, Daniel Ellsberg spoke about the ambiguity effect in an article that was published in the Quaterly Journal of Economics, presenting a situation in which people were offered two boxes. In one, they were told there was an equal number of red and black balls, but in the other the proportion of balls was unknown.
The people were asked to bet on the colour of the ball that would be randomly selected by them, with Ellsberg discovering that most people would choose the first box if they were betting on red. When asked which box they’d choose if betting on black, they also said the first box, even though that isn’t particularly coherent from a statistical point of view. It isn’t possible for it to be more likely to get a red ball in the first box and more likely to get a black ball in the first box, but people opted for that over the second box’s uncertainty.
Why It Matters
It is entirely fair to ask why, exactly, the ambiguity effect matters. The answer comes in the form of how we weigh-up our options, often failing to give equal weighing to everything when there is a degree of ambiguity involved. This means that our decision making can be affected when there is some ambiguity to take into consideration, often resulting in us putting our trust into one thing because the other option is felt of as being too risky due to the outcome being somewhat ambiguous. Our thoughts are limited, meaning that long-term benefits can be limited.
There is obviously a link to the world of loss and risk aversion, which we’ve written about elsewhere on this site, with the major difference being the amount of available information. Risk aversion sees us with information about both options but lean towards the less risky one, whereas the ambiguity effect is when we only know the probability of a certain outcome with one of the options and we have no information at all about the other. The ‘other’ in this case is thought of as being risky, even though it could actually work in our favour.
Why It Happens
The exact reasoning behind the ambiguity effect isn’t clear, but it is likely to be something that happens because we are conditioned to try to make quick decisions by rule of thumb. People generally always feel better when the option that they’re choosing is one that they know something about, as opposed to it being something that can be left to the imagination. It is something of an adaptive response, allowing people a quick and effortless option in their decision-making and problem-solving during their everyday life.
The problem is that it doesn’t actually offer such a quick solution to all circumstances. The work of Frisch and Baron pointed out that the ambiguity effect is also something of a framing effect. Anything can be made to appear ambiguous, depending on the attention that is drawn to certain aspects of a decision or ignored with other decisions. Using the ambiguity effect might well allow people to make quick decisions, the decisions that are made by using it are not reliable and therefore put you in a situation where you could be making poor decisions on a regular basis.
How It Relates To Betting
Elsewhere on this site, you can read a piece about uncertainty being its own reward. In essence, we release dopamine when the outcome of an event is uncertain, just as we do when we are enjoying ourselves. This means that people are just as likely to enjoy gambling when they lose as when they win, as long as they get a moment of not knowing what’s going to happen. In many ways, the ambiguity effect is the opposite of this, with people disliking the unknown to such an extent that they will ignore options that are too ambiguous.
An example of this in the betting world is when we will take a bet with poor odds over one in which the odds are unknown, simply because we seem to prefer a small amount of information or negative information over no information whatsoever. Imagine a scenario in which Everton are going up against Manchester City in the FA Cup. We know that Everton aren’t as good as Manchester City, but there are rumours that most of City’s team has come down with an illness. We haven’t been able to verify this, but we have seen pictures of Everton’s first-team boarding their coach and everyone is present.
In spite of the fact that it is extremely unlikely that Everton will win the FA Cup tie, we prefer the idea of placing a bet on them because we know with certainty what their team will look like. What City’s team will look like is entirely ambiguous and therefore we avoid betting on it, even though a bet on City is more likely to be a winner than a wager on the Merseyside club. This is an example of the ambiguity effect at play, altering our approach to the bets that we choose to place because of a lack of information.