The Ellsberg Paradox explains why we aim low and settle for the mediocre. Here’s how you combat the fear of uncertainty using this clever thought experiment.
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 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 he found is 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.
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 risk aversion, 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:
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 backburnered?
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. Other People Don’t Get It
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.
Conclusion
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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Image by Muffet.
As an entrepreneur, people assume I’m a risk taker. Nope – I’m even more risk averse than them.
Only by re-framing the problem and facing facts was I able to overcome the ellsberg paradox (instead of looking at it like this:
High paying job – probability of high money = high
vs.
Start small business – probability of very low money = high; probability of very high money = small, I looked at it like this:
High paying job – probability of high happiness = very low
vs.
start small business – probability of high happiness = very high)
I don’t think the usual inspiration approach is the most effective (e.g. appeal to materialism – don’t you want to be rich nonsense).
Great post!
Amit, thanks for your thoughts! Determining what makes you happy is definitely a key component to breaking out of this paradox. You’re right that the link between money and success isn’t as strong as people might think. As I like to say, self-fulfillment is the only true measure of success.