Ellsberg Paradox

The Ellsberg Paradox illustrates that people tend to prefer known risks over unknown ones, even when the expected outcomes are similar. For example, given two urns with colored balls—one with a known distribution and one with an unknown—individuals often choose to bet on the urn with the known probability, displaying ambiguity aversion. This behavior shows that humans are uncomfortable with uncertainty, favoring options where chances are clear, highlighting deviations from traditional economic theories expecting rational decision-making based solely on risk.