You’re in a room with two large urns.
The urns are covered so you can’t see inside them. But you know the urn on the left contains 50 white marbles and 50 black marbles. The urn on the right also contains 100 marbles, but the ratio of white to black marbles is unknown, with every ratio as likely as any other.
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What Ellsberg found is that people overwhelmingly choose to draw the ball from the urn with a known set of probabilities, rather than take a chance on the urn with an unknown ratio.
This is despite the fact that the second urn could have better odds of drawing black marbles, like 99 to 1 or even 100 to no white marbles. Of course, the ratio in the unknown urn could also be tilted in the other direction. There’s no way of knowing.
The fact is, the probability of drawing a black marble from either urn is identical.
To verify this for yourself, just simplify the example.
Instead of 100 marbles, imagine there are only 2. In the known urn, there is 1 black and 1 white. In the unknown urn, one-third of the time you’d be picking out of an urn with 2 black marbles. Another third of the time, 2 white marbles. And another third of the time, the urn has 1 of each.
When you sum these probabilities up, you see that the chance of picking a black marble in the second urn is identical to picking one from the first urn: 50%.
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The takeaway? People exhibit strong aversion to ambiguity and uncertainty, meaning they have an inherent preference for the known over the unknown.
The Ellsberg Paradox: Why You Don’t Take Risks and Settle for the Mediocre
Thanks to Finshots for dropping this one in my inbox.
