The impact of the ambiguity effect on decision-making

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When something is described as ambiguous, it means that it is confusing, unclear, or open to different interpretations. Entrepreneurs face ambiguous situations all the time; it’s the nature of the business. For example, entrepreneurs make decisions about pricing, marketing, vendors, and finances that don’t have certain outcomes. In addition, entrepreneurs often have to make choices for their businesses based on limited information.

When faced with choices that have uncertain outcomes, our brains tend to rely on mental shortcuts, which can lead to cognitive biases. One of these cognitive biases is called the ambiguity effect. The ambiguity effect leads us to believe that outcomes with the highest known probability are always the best for the business, but that’s not always true. Let’s explore the ambiguity effect, our tolerance for ambiguity, and how you can manage uncertain situations that arise in work and life.

When we avoid options with less information

The ambiguity effect works like this: when faced with deciding between two possible outcomes — one with a known probability and one with an unknown probability – research shows that we tend to choose the option with the known probability. Our brains skip the hard part of making estimates or guesses about the ambiguous choice and go straight for the more familiar option. In other words, we don’t like to mess around with the unknown, so we avoid it as much as we can.

The most famous example of the ambiguity effect comes from Ellsberg’s paradox. The experiment he described went something like this:

  1. There are two buckets, and each one has 100 black balls and red balls.
  2. You know that the first bucket has 50 red balls and 50 white balls
  3. You don’t know the ratio of black to red balls in the second bucket.

Someone asks you to place a bet on a ball color and choose your bucket. You decide to bet $40 that you will pull out a red ball. Which bucket do you select?

The second bucket could have 99 red balls and one black ball, or vice versa. Without knowing the ratio, we can’t calculate our odds of winning. So, in most cases, people choose the first because they know they have a 50% chance of winning the money. However, by avoiding the ambiguous choice, we may miss the opportunity to take a risk and increase our odds of winning.

The impact of the ambiguity effect

If you’re not someone who spends time betting on balls in buckets, consider how the ambiguity effect influences our shopping habits. One study found that people tend to choose products and services from well-known brands because they believe that familiar brands have better quality products than lesser-known brands. Since consumers don’t know anything about the unfamiliar brand, they stick with brands they have seen before. It sounds like a safe bet, right?  Not necessarily.

The buyer faces three potential consequences for their decision:

  • The buyer chooses a mediocre product because they aren’t aware that an unfamiliar brand has the best quality item.
  • The buyer loses money by spending it on a more expensive brand-name product that doesn’t work as well as its competitors.
  • The buyer misses out on the opportunity to put their money into a product that will meet their needs.

Or, from the business owner’s perspective, you miss out on income for your superior product because the shopper didn’t recognize your brand.

Tolerance for ambiguity

In a report about handling ambiguity in the workplace, the Queensland University of Technology Business School suggests that we all have different tolerance levels for ambiguity. The report defines tolerance for ambiguity as “the tendency for an individual to perceive ambiguous situations as desirable.”

People with a low tolerance for ambiguity tend to view uncertain situations as adverse. For example, people struggling with anxiety tend to assume that uncertain situations are bad or even threatening. In a study of children and adolescents with anxiety disorders, researchers found that youth with anxiety had a much lower tolerance for ambiguity than the control group. 

Yet, those with a high tolerance for ambiguity tend to view the unknown as something positive. These individuals view ambiguity as a challenge, a chance to try something interesting, and an opportunity for problem-solving. People in this category are comfortable with ambiguity and are more open to complexity, new ideas, and solving challenging problems. One study even suggests that people with high ambiguity tolerance are more likely to trust others and work cooperatively with a team. 

How to overcome the ambiguity effect

It’s essential to be aware of our cognitive biases to recognize them in our thinking before making decisions. Now that you have this awareness, use it to challenge your thinking and decision-making processes. To start, think about a time when you had to decide with limited information. How did you approach it? Do you remember how you felt while trying to make a choice? Which option did you choose, ultimately? Self-reflection can help you figure out where you are on the spectrum of ambiguity tolerance.

Suppose you believe that you have low levels of tolerance for ambiguity. In that case, you can increase your comfort levels by practicing the following:

  1. Practice mindfulness. When we can be aware of and regulate our emotions, it becomes easier to recognize the fear of the unknown and separate it from our decision-making processes.
  2. Make time. While this can be challenging – there are so many other things to do! – it’s critical for entrepreneurs to carve out time and create a space to think about the decisions they need to make. We need enough time to think and weigh out all options to make the best choice. Without that time, our brains will try to take shortcuts that can lead to less-optimal outcomes.
  3. Get creative. Instead of getting stuck in a state of fear, research suggests it can be helpful to embrace our creativity when faced with uncertain situations. How can you think about problems differently? What out-of-the-box ideas might work for your brand?

Finally, when faced with uncertainty, develop a clear vision and focus on what you want the outcomes to be. The Harvard Business Review gives an example of raising “good kids”. Is a good kid one who plays sports well? Gets all A’s? Volunteers in the community? Parents can look up all of the parenting resources available. Still, if they don’t have a clear vision of what they mean by raising a good kid, they might end up following the wrong advice.

The same is true for any area of work and life. When you articulate what you want the outcomes to be, it is easier to make choices to get you to your goals, even when facing ambiguity.