The Ambiguity effect is an invisible phenomenon that we see in our daily life but fail to recognize because it is born naturally through a person’s instinct. This effect was for the first time described by Daniel Ellsberg in the year 1961. This effect is based on a cognitive bias where a person’s decision making is affected due to a lack of information. The effect mainly explains that people usually tend to select those options the outcome of which is favorable to them and known.
It also means that a person does one thing for which he has confidence that the given task will get them a good result, and they choose such an option over an option for which they think that their chances of a favorable outcome are not known or not specified. Here the word cognitive biases mean that a person makes his own thinking upon a particular matter and has their own perception of viewing on the matter this may sometimes lead to perceptual distortion, in some cases this may cause an unstable judgment, and even worse it may lead to an illogical interpretation of any factor or situation.
IMPACT ON MONEY MARKET
A very unique example of this can be given by money investors in case if anyone wants to invest their money, they always seek an opportunity to invest them in the banks or any safe place where they are sure of the thing that they will get an assured return and their money is safe. On the other hand, the bonds and share that is the share market are also a place of investing money but people usually prefer banks and other safe opportunities to keep and invest their money. The only reason why they do not prefer share market is because they there is a risk of their money being lost if the share market goes down though share market has a higher return than compared to any banks or any other place still people do not easily prefer them just because there is a heavy risk so this proofs the point that people usually prefer to take a chance on situations where they know that they will get assured profit and never prefer such a chance in which the profit is unknown.
One very good explanation of this effect is that people have a hard and fast rule and it is normal human behavior to avoid options where information is missing or incomplete in their knowledge. This will often lead them to seek for the missing information. But here also in many of the cases, the exact and correct information cannot be obtained. Hence the person tends to rely only on those facts of which they have complete knowledge.
The saying “Better the devil you know than the devil you don’t know” holds so true now. This means that if you have two choices then always rely on which you know something about it is always better than relying on something to which you have no idea about because that will definitely lead to failure. The result of two options may be the same but if you know the probability of one and with the other option the probability of success is unknown, then we prefer to go with the option of known probability to us. In such cases, our options tend to be biased and are always based on a decision that has fewer chances of risk, and hence people will stick with safer options.
This effect goes in as directly proportional to negative information. This means that if we have incomplete knowledge of something then this directly explains that the information might be negative (not harmful but not of our use) a more correct explanation of this could be that it is a normal human mind to have knowledge of only those things which benefit them and the things that do not benefit us we have either least interest in that particular thing or in some or the other way it has a negative impact on us. The best example of this can be during buying a product or voting for someone.
For the most part, the ambiguity effect is a rational bias, however, we can also say that it also holds us back or refrain us from trying new things, new ideas, and potential. It has long term impacts on our life. In the simplest form, it could be said that this effect may stop us from trying something new for example just like at a restaurant as something familiar. Because going to the risk a person stops himself to try something new and thus people remain tangled in their own old thoughts.
The main remedy of the ambiguity effect is to have a clear image in mind. If you are clear to people what they get in return from something that you present them then they will feel more confident to have a thought on that. By giving them the information clearly and explaining them the pros and cons, then simply they will have higher confidence in your option over someone/something else which may in some or the other way benefit that person.
Giving the people valid proof and introducing them with the method of this new idea may help them in adopting it more easily because people believe more about the things that they see practically rather than what they hear. Self-consideration is also very important, a person should consider both the sides equally, have complete knowledge of both, do researches completely and then draw the conclusion considering the advantages as well as disadvantages of both, this will help them in better decision making.