Burned by Unknown Unknowns
Or how the exposure to different types of uncertainty can have long-lasting effects on individuals’ risk-taking behaviour.
This is a really interesting paper: "Decision Making with Imperfect Knowledge of the State Space", by Friederike Mengel, Elias Tsakas, Alexander Vostroknutov (Maastricht University). It was presented at the Psychology and Economics segment of SITE (Stanford Institute for Theoretical Economics) Workshop.
In their experiment, the authors study how people exposed to different types of uncertainty adjust their risk-taking behaviour.
They consider three types of uncertainty:
- Risk — There is perfect information about the possible outcomes and associated probabilities;
- Ambiguity — The outcome space is known but the associated probabilities are not;
- Unawareness — There is imperfect knowledge of both possible outcomes and the associated probabilities.
Their main finding is that: "participants who have been exposed to an environment with imperfect knowledge of the state space subsequently become more risk averse in standard decision making under risk than participants who had full information about the state space."
I first learned about this study from Russell Thomas, who remarked: "Ignorance is not bliss. Getting burned by unknown-unknowns does damage to healthy rationality and leads to excessive caution."
The paper is worth reading.
