Have you heard someone mention a fear of the unknown when deciding against getting involved in a situation? Have you ever avoided a situation because you feel the outcome is unknown?
Say you’re presented with two options. The probability of the first option resulting in a certain favourable outcome is known, whereas the probability of the second option resulting in said outcome is unknown. If you tend towards the first option, you’re presenting a behaviour known as Ambiguity Aversion; the tendency to favour the known over the unknown, including known risks over unknown risks.
What’s the difference between risk aversion and ambiguity aversion?
Risk aversion occurs when the probabilities of any option resulting in certain outcomes are known. In these cases, those who are more risk-averse will choose the option that results in a smaller risk, because it has a greater probability of success than the option with potential for a larger risk. For example, if you had the chance to either win £100 or gamble the money for a chance of winning double, you would probably choose the £100 rather than taking the gamble and possibly winning nothing because the outcomes are known.
However, ambiguity aversion occurs when the probabilities of some options are unknown. In this case, those who are more ambiguity-averse will opt for the options where the outcome is known. For example, participating in stock trading is risky because the outcomes are unknown. You could make a large profit from trading, but you could also lose your capital. Therefore, those who are ambiguity-averse would avoid participating in the stock market and risking their capital because the outcomes are unknown.
Unlike ambiguity aversion, which is not predicted by any psychological measures, risk aversion is linked to several different traits, such as IQ and higher levels of ambition.
While this demonstrates that risk aversion and ambiguity aversion are two distinct behaviours, it does not provide an explanation for why ambiguity aversion occurs. It’s important to note that different people have different levels of ambiguity aversion.
Ambiguity aversion can negatively impact decision making because awareness of outcomes tends to influence our willingness to make a decision.
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