Ambiguity effect

The tendency to prefer options with known probabilities over options whose outcomes have unknown or ambiguous probabilities, even when their possible rewards are comparable.

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Ellsberg paradox: A choice problem in which people prefer betting on a known probability over an unknown one, challenging expected-utility predictions. Its urn choices provide the classic demonstration of preference for known odds.
Daniel Ellsberg: An American political scientist whose 1961 thought experiments introduced the famous challenge to expected-utility theory. His urn problem made ambiguity preferences sharply testable.
Ambiguity premium: The extra expected return investors demand to hold assets with ambiguous rather than known risks. It expresses the effect as a price demanded for bearing uncertain probabilities.
Risk aversion: A preference for a certain outcome over a risky prospect with the same expected value and known probabilities. It concerns known probabilities, whereas the ambiguity effect concerns unknown ones.
Measuring ambiguity aversion: Methods for estimating how strongly a person prefers known probabilities over ambiguous ones. Different elicitation methods can produce different estimates of the effect.
Ambiguity aversion: A preference for known risks over uncertain probabilities, distinct from dislike of risk with known odds. It names the preference that produces the ambiguity effect.
Expected utility hypothesis: The principle that rational choices among risky prospects maximize the probability-weighted sum of their utilities. The ambiguity effect became notable because Ellsberg choices conflict with its conventional account.
Home bias in investment: Investors' tendency to hold more domestic assets than standard portfolio theory predicts. Familiarity with domestic markets can make their risks seem less ambiguous than foreign ones.
Probability weighting: The tendency to transform stated probabilities when evaluating choices, often giving small probabilities disproportionate influence. It can alter responses to known odds without requiring ambiguous probabilities.
Source preference in ambiguity: The tendency for choices under ambiguity to depend on how the uncertain probabilities were generated or described. It complicates the idea that ambiguity aversion is a stable response to missing probabilities.