Over the last 12 months, I have started listening to a lot of podcasts. One of such podcasts is The Knowledge Project which has a lot of interesting conversations ranging from science, mathematics, people and psychology. On one of the recent episodes the speaker was Jim Collins. A particular term he used in the podcast got me into deep thinking mode. The term was called Ambiguity aversion (or Uncertainty aversion).
What is ambiguity aversion?
On first glance, it doesn’t make a lot of sense. Most of us have come across the term risk aversion. It’s the idea that we are averse to risk or we want to actively try to avoid risk. Most people can be risk averse in some or the other situations. For example: would we want a guaranteed $100 or roll a dice to win $250 on even, nothing on odd. The answer is that most of us are risk averse and don’t want to take the risk of rolling the dice so we take guaranteed $100 payout even though the expected probability of the other scenario is $125 ($250*0.50 + $0*0.50).
The point Jim Collins was trying to make is that we assume people are generally risk averse but if you dig into it a little bit more, you may realize that people are actually Ambiguity or Uncertainty averse. It essentially means that people try very hard to avoid uncertainty in their lives and will sometime make decisions that might have higher risks as long as it removes uncertainty immediately.
When I heard this I was mind blown because I was among those people who assumed people were risk averse but now that I hear the ambiguity averse argument, it feels like of course! Why did I never think of it before. It seems natural (and I have done this so many times) to want to make a decision immediately so that I don’t have to keep thinking of the uncertainty.
Scenarios
For example, your desire to not worry about whether the stock price will go up or down can usually make you take more impulsive buying or selling decision. If you hold on to not buying or not selling a few more days and wait out a possible negative event, you may improve the risk profile of the decision you are making.
Another example could be, when you are tired and looking for a new job and you find the first new job and you want to accept it immediately even if it’s not the perfect option because you don’t want to deal with the uncertainty that comes along with keeping things hanging.
Decision making
Usually we like to act rather than not act. This is a function of not risk aversion but uncertainty aversion. Our decisions usually to act fast are driven by not wanting to prolong our misery of dealing with uncertainty. Often times it has nothing to do with the right decision.
So, how can you use this to your benefit? Well, if you have to make a decision and if the risks involved in this decision don’t change for 1 month, it might be prudent to take the additional month to find and digest more information that might improve the quality of your decision. However this would involve you sitting on the uncertainty that you may decide either way and not being able to plan your future around those outcomes. If we are really risk averse, it is in our best interests to sit on the decision until we absolutely have to take it and take it at that last moment when you have most information to decide better risk tradeoffs. But most times, leaving something hanging for that long is not something we are able to do easily.
Suffering ambiguity
Another type of uncertainty ambiguity is when you are dealing with adverse situations where we are suffering. Imagine you are stuck in a bad situation with no control of when it will end. Or the suffering that people endured in concentration camps, or war prisons, or a natural disaster. Or even imagine the suffering people may deal with being stuck in a foreign country in COVID away from family. It’s hard to know when this suffering will end. This is extremely hard to bear. If we knew how long the suffering lasts, there’s certainty and we know it will end and we will get through it. But not knowing how long it will last, can be heart breaking and potentially deadly to our morale and life.
A more relatable example (at a much smaller suffering scale) is that if you are running a marathon and you are on mile 20, if you know it’s a 23 mile / 50 mile / 100 mile marathon it’s much easier to get through it because you know that eventually this suffering will end. But if you did not know how long it might take, it might just be soul crunching that you just have to keep running and hope one day it will end.
My personal learning
In COVID times, I feel like I have had to learn this. Not because I knew of uncertainty aversion and wanted to make better decisions but because that’s the situation life put me in. There was just so much uncertainty that it was impossible to avoid it completely. In that scenario, I had to get used to the idea of not being able to decide until a later event happen that would inform my decision. This meant that I had to sit on decisions for months, just because it was impossible to make an informed decision anytime sooner. I feel like it’s been a very important learning for me over the last 12 months.