Example of Ambiguity Effect
- An investor keeps their savings in low-interest accounts rather than diversified stock portfolios because they find market volatility "too uncertain," even though historical returns favor stocks over the long term.
Known but inferior returns were preferred over unknown but likely superior returns. - A company continues using an outdated supplier relationship rather than exploring new vendors who might offer better terms, because the potential benefits are uncertain.
The ambiguity of switching outweighed possible improvements.
Note
First described by Daniel Ellsberg in 1961 through his famous "Ellsberg Paradox" involving choices between urns with known and unknown probability distributions.
