Ambiguity Aversion And The Decision Making Process Essay

2151 Words Nov 29th, 2016 9 Pages
One of the first topics discussed at the beginning of the course was risk aversion, which examined the way individuals make decisions when there is a possibility that one of the potential outcomes that can be achieved is undesirable when compared to a perceived better alternative. As explained from during lectures and readings, and illustrated by actual experiments, individuals are more likely to be risk averse or risk neutral than risk loving. While the concept of risk aversion influences nearly every important decision we, as humans, make in our life, it is not the sole factor in the decision making process of rational, self-interested individuals: ambiguity, or the aversion to it, is an equally if not greater influencer in the decision-making process. Our group decided to explore the topic of ambiguity aversion in order to emphasize the role it plays in decision-making. Through a practical testing of the Ellsberg paradox we were able to both reinforce the notion that individuals are risk adverse, as well as show that the majority of individuals are also in fact ambiguity averse.
In economics, ambiguity is defined as an individual’s incomplete knowledge of situations potential outcomes: leading to a lack of clarity over the exact likelihood of an outcome, and its corresponding payout. This fundamentally differs from the concept of risk, which provides the individual with the information necessary to accurately ascertain the probabilities of both the positive and…

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