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Concept
Ellsberg paradox
Summary
In decision theory, the Ellsberg paradox (or Ellsberg's paradox) is a paradox in which people's decisions are inconsistent with subjective expected utility theory. Daniel Ellsberg popularized the paradox in his 1961 paper, "Risk, Ambiguity, and the Savage Axioms". John Maynard Keynes published a version of the paradox in 1921. It is generally taken to be evidence of ambiguity aversion, in which a person tends to prefer choices with quantifiable risks over those with unknown, incalculable risks.
Ellsberg's findings indicate that choices with an underlying level of risk are favored in instances where the likelihood of risk is clear, rather than instances in which the likelihood of risk is unknown. A decision-maker will overwhelmingly favor a choice with a transparent likelihood of risk, even in instances where the unknown alternative will likely produce greater utility. When offered choices with varying risk, people prefer choices with calculable risk, even when they have less utility.
Ellsberg's experimental research involved two separate thought experiments: the 2-urn 2-color scenario and the 1 urn 3-color scenario.
There are two urns each containing 100 balls. It is known that urn A contains 50 red and 50 black, but urn B contains an unknown mix of red and black balls.
The following bets are offered to a participant:
Bet 1A: get 0 otherwise
Bet 2A: get 0 otherwise
Bet 1B: get 0 otherwise
Bet 2B: get 0 otherwise
Typically, participants were seen to be indifferent between bet 1A and bet 2A (consistent with expected utility theory) but were seen to strictly prefer Bet 1A to Bet 1B and Bet 2A to 2B. This result is generally interpreted to be a consequence of ambiguity aversion (also known as uncertainty aversion); people intrinsically dislike situations where they cannot attach probabilities to outcomes, in this case favoring the bet in which they know the probability and utility outcome (0.
Official source
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