The Ellsberg Paradox

The Ellsberg Paradox illustrates that people prefer known probabilities over unknown ones, even when the potential outcomes are the same. Imagine choosing between two bets: one with a known chance of winning, and another with an unknown chance. Many prefer the known, illustrating ambiguity aversion—a reluctance to bet where the odds are uncertain. This behavior contradicts expected utility theory, highlighting that human decision-making often involves a preference for certainty, even if it might not lead to the best possible outcome. The paradox reveals how our comfort with risk influences choices beyond purely logical calculations.