## AMBIGUITY AVERSION

The aversion to ambiguity (ambiguity aversion) can be defined as the attitude of individuals to prefer uncertain situations, but of which the probability of risk is known, with respect to completely uncertain situations (ambiguous), of which they are risk percentages are also unknown. This aversion is one of the most studied in Behavioral Finance.

One of the first scholars to formalize the concept of aversion to ambiguity is Ellsberg (1961), who set up an experiment known as the Ellsberg paradox. He hypothesizes the existence of two urns (urn 1 and urn 2) containing both 100 balls of red or blue color. The urn 1 contained 50 red balls and 50 blue balls, while the urn 2 did not know the exact distribution of the balls. Ellsberg gave a survey to a sample of subjects, who were asked to choose between the following two bets, each of which involves a possible win of 100 based on the color of the ball drawn at random from the corresponding urn:

a1: when a ball is drawn from the urn 1, 100 $ is received if it is red and 0 $ if it is blue

a2: extracting a ball from the urn 2, you receive 100 $ if it is red and 0 $ if it is blue

Second bet

b1: extracting a ball from the urn 1, you receive 100 $ if it is blue and 0 $ if it is red

b2: extracting a ball from the urn 2, you receive 100 $ if it is blue and 0 $ if it is red

Both in the first and in the second case, individuals were asked in which of the two urns they preferred to fish. In both cases, the persons belonging to the sample were shown to prefer urn 1 (so a1 was preferred to a2 and b1 was preferred to b2), of which the percentage of distribution of the balls in the urn was known. This shows an aversion of people towards what is uncertain and whose probability is unknown, compared to an uncertain situation in which the probabilities are known.

Often the ambiguity aversion arises in the presence of the so-called comparative ignorance (Fox and Tversky 1995), that is when the subject in the decision-making ambit sees his limited competence. For example, in sports, if a football expert finds himself having to choose whether to bet on an automobile event rather than on a football event, he will feel incompetent with respect to the first event and will prefer to bet on the second event. Indeed, bettors always have a preference to bet on the event that is most familiar to them, manifested by their aversion to everything that is uncertain and ambiguous. It is important to distinguish between aversion to risk and aversion to ambiguity: the first derives from a situation in which a probability can be assigned for every possible outcome of an event, the second derives from situations where the probabilities of the results of an event are unknown with the consequent rejection of risk.*References*

Ellsberg D. (1961). Risk, ambiguity and the Savage Axioms. Quarterly Journal of Economics, Vol. 75, No. 4, pp. 643-669. The MIT Press.

Fox C., Tversky A. (1995). Ambiguity Aversion and Comparative Ignorance. Quarterly Journal of Economics, 1995, vol. 110, issue 3.