The Ellsberg Paradox: Why You Don’t Take Risks and Settle for the Mediocre

The Ellsberg Paradox explains why we aim low and settle for the mediocre.

Here’s how you can combat the fear of uncertainty using this clever thought experiment.

The Ellsberg Paradox

Welcome to Throwback Thursday, where we take a look at a past Agile Lifestyle feature that’s still as timely and relevant as ever. This article has been completely updated and expanded with the latest research and information.

You’re in a room with two large urns.

The urns are covered so you can’t see inside them. But you know the urn on the left contains 50 white marbles and 50 black marbles. The urn on the right also contains 100 marbles, but the ratio of white to black marbles is unknown, with every ratio as likely as any other.

Here’s the game: If you can draw a black marble in one pick, without looking, you win $100.

Which urn do you draw from?

Keep your answer in mind. Before we get to that, here’s some background on this intriguing thought experiment:

What Is the Ellsberg Paradox?

The Ellsberg Paradox is named for Daniel Ellsberg, the U.S. military analyst most known for leaking the Pentagon Papers.

But before all that, he was a Harvard economist interested in human behavior and decision-making.

Specifically, how people make decisions under conditions of ambiguity or uncertainty.

This question led him to run a series of experiments in 1961 much like the scenario above.

So which urn did you pick?

What Ellsberg found is that people overwhelmingly choose to draw the ball from the urn with a known set of probabilities, rather than take a chance on the urn with an unknown ratio.

This is despite the fact that the second urn could have better odds of drawing black marbles, like 99 to 1 or even 100 to no white marbles. Of course, the ratio in the unknown urn could also be tilted in the other direction. There’s no way of knowing.

The fact is, the probability of drawing a black marble from either urn is identical.

To verify this for yourself, just simplify the example.

Instead of 100 marbles, imagine there are only 2. In the known urn, there is 1 black and 1 white. In the unknown urn, one-third of the time you’d be picking out of an urn with 2 black marbles. Another third of the time, 2 white marbles. And another third of the time, the urn has 1 of each.

When you sum these probabilities up, you see that the chance of picking a black marble in the second urn is identical to picking one from the first urn: 50%.

If people were perfectly rational, we wouldn’t have a preference for either urn, so about half would pick the first urn and the other half would pick the second. You might also think that when the experimenters explained this to the subjects, many would pick the second urn or have no preference.

What Ellsberg found instead is that a significant number of people who had the paradox explained to them still strongly preferred the first urn!

The takeaway? People exhibit strong aversion to ambiguity and uncertainty, meaning they have an inherent preference for the known over the unknown.

The Ellsberg Paradox has a number of implications for you as you move on your journey towards an agile lifestyle:

“Should I Start My Own Business?” and Other Highly Uncertain Scenarios

The Ellsberg Paradox affects all kinds of decision-making, including the big decisions we make about life and career.

Dr. Daniel Crosby, writing for Psychology Today, argues that our brains are not great tools for the type of decision-making we need at the dawn of the 21st century:

Drawing on his background in evolutionary psychology, James Friedrich has come to the conclusion that as we evaluate important decision in our life, our primary aim is to avoid the most costly errors. That is, we make decisions that make us “not unhappy” rather than “blissful.” We want to be “not broke” more than we want to live abundantly. To use some familiar colloquialisms, we choose a sure “meh” over a possible “woohoo!” In life as in financial markets, we are far more likely to focus on the potential perils of failing than we are the happiness and financial freedom that might accrue to us.

Friedrich’s insight means that our brains aren’t great at processing choices in a world where most of our material needs are met, but our psychic needs can go wanting:

What we are left with is a brain and a decision-making modality that is ill-suited for our modern milieu. We are programmed to choose safety, even at the expense of joy, in an environment where safety abounds and joy is hard to find. Numerous studies have shown that people are twice as upset about a loss as they are pleased about a gain (just ask my Dad the stockbroker if he gets as many calls when the market is up as he does when it’s down). Unless we learn to train our brains to evaluate risk and reward on a more even keel, we will remain trapped in a life of risk-aversion that keeps us from taking the very risks that might make us happy, not to mention wealthy.

Our brains are poorly evolved for doing what entrepreneurs do. In fact, they’re poorly evolved for any kind of activity with risks, regardless of the potential out-sized rewards.

We’re more likely to focus on the potential losses of leading the lives we want rather than the possible gains in fulfillment, freedom, and meaning.

Because of our intense dislike of ambiguity, people will give up a lot to move from a game with uncertain odds to a game with certain odds—even if the game with certain odds stinks.

That’s messed up.

But how else do we explain the legions of unfulfilled lawyers cluttering up the professional ranks?

Or the unhappy, inertia-driven employees working for spectacularly bad bosses?

We’ll choose a game with known rewards and risks—a paycheck twice monthly for barely competent work—over any venture with VUCA tendencies (VUCA stands for volatility, uncertainty, complexity, and ambiguity).

Here’s the problem: Every career choice in life has VUCA tendencies. Especially in the rapidly changing world that we live in today.

We live in a VUCA world.

4 Ways the Ellsberg Paradox Inhibits Your Decision-Making

1. You Stick With a Known Situation, Even if It’s Bad for You

Wonder why so many of us are stuck in the 9 to 5 grind, sinking in ruinous debt, while our dreams keep getting put on the backburner?

The Ellsberg Paradox suggests a reason: Human beings are so risk averse that we choose to stick with bad situations rather than face uncertainty. Uncertainty is scary.

But is fear of the unknown going to keep you stuck in a situation you know is making you miserable?

2. You Can’t Embrace Change

When change is outside of your control, the psychological barriers are even worse.

Part of the reason volunteers don’t pick the second urn in the Ellsberg Paradox is that the ratio of white to black marbles is outside your control. Picking a black marble out of either urn is still up to chance, but at least the ratio can’t change on you like in the second urn.

Embracing change is one of the key strategies to live an agile lifestyle. Because the world around you is changing so quickly, only the agile among us will thrive. But being agile means getting comfortable with the vast amount of stuff that’s outside your control.

And that’s hard.

3. You Aim Low and Settle for Mediocre Results

The second urn in the Ellsberg Paradox could contain 100 black marbles and you’d always win the $100. But you’ll never know since you always stick with the 50/50 urn.

That’s how many of us treat our lives. We stay in mindless corporate jobs for the “security” and climb the ladders others set out for us, never thinking what heights we could reach if we were just a bit more comfortable with uncertainty.

4. You Let Other People Talk You Out of Everything

While you’re struggling with all this ambiguity, the other people in your life definitely won’t get it.

From the outside looking in, they’ll never understanding why you want to give up your high-prestige Fortune 500 job for the chaotic uncertainty of being an entrepreneur or an artist.

Because they don’t know the toll it’s taking on you mentally, physically, or emotionally, they compare the things they can measure (salary, benefits, etc.) and figure you’re crazy for going with the unknown.

Uncommon Success Requires Uncommon Action

The situation isn’t hopeless. Now that you know the Ellsberg Paradox is affecting the way you react to risk and uncertainty, you can take steps to shield yourself from its effects.

The first is to realize that only by embracing some risk can you reach uncommon success.

Why is anyone surprised when average choices and cookie-cutter tactics lead to mediocre results?

The solution is to stick your hand in the second urn and take a chance.

♦♦♦

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Until next time!

A version of this article first appeared on July 19, 2012.

Image by Muffet.

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