What's the difference between risky and ambiguous uncertainty?
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Risk and ambiguity represent distinct forms of uncertainty. Risk involves known probabilistic outcomes, while ambiguity entails unknown probabilistic outcomes. Individuals generally find ambiguity more aversive than risk, as shown by increased physiological responses to ambiguous situations. Ambiguity can lead to cautious behavior and generate welfare losses, unlike risk, which primarily results in uncertainty premia in asset markets. Interestingly, attitudes towards ambiguity, rather than risk, predict prosocial behavior, with higher ambiguity tolerance correlating with increased engagement in costly prosocial actions. Furthermore, imprecision in risk estimates can lead to behavioral distortions like ambiguity aversion, causing overreactions to uncertain threats. Overall, the distinction between risky and ambiguous uncertainty lies in the nature of the probabilistic outcomes and their respective impacts on decision-making and behavior.
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| Papers (4) | Insight |
|---|---|
| Risky uncertainty has known probabilistic outcomes, while ambiguous uncertainty has unknown probabilistic outcomes, with people finding ambiguity more aversive than risk in decision-making. | |
52 Citations | Risky uncertainty involves known probabilistic outcomes, while ambiguous uncertainty involves unknown probabilistic outcomes. Ambiguity attitudes, not risk attitudes, predict prosocial behavior. |
7 Citations | Risky uncertainty is quantifiable, while ambiguous uncertainty lacks measurable probabilities, leading to caution and welfare losses, distinct from risk, impacting asset markets and behavior. |
1 Citations | Risky uncertainty involves known outcome probabilities, while ambiguous uncertainty has unknown outcome probabilities. Neural dynamics show distinct responses to risk and ambiguity during value-based decision making. |
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