Eduardo A. Schilman, Ph.D

 

 

2

2

Ellsberg, D. (1961). Risk, ambiguity, and the Savage axioms. The quarterly journal of economics, 643-669.

 

1

Frisch, D., & Baron, J. (1988). Ambiguity and rationality. Journal of Behavioral Decision Making, 1(3), 149-157.

 

 

2 

HEURISTICS 

 

 

 

 

We all use them, and rightfully so. But we should remember that like most things,

there's a good and bad to heuristics too:

 

The Good

Provides fast, close to optimal, answers when time or cognitive capabilities are limited.

 

The Bad

Violates logical principals and can lead to errors.

 

A good analogy here can be seen when looking at URL shorteners. A research performed by Buddy Media (now part of Salesforce) has shown that despite the popularity of URL shorteners, engagement was 3 times higher for full-length URLs! It appears that using these shortcuts had a downside to them. While most people find long strings of text boring, annoying and prefer shortened versions when available, the full-length URLs had the entire data reflected in them. So while https://itunes.com/apps/getstocks might be shortened to https://goo.gl/PjwSmX, a quick glance at the long URL entails trust and understanding – we know where we are being led to: the itunes store, to get an app. Getstocks app. The short URL on the other hand has no data at all. People distrust vagueness. They tend to act exponentially less on CTA (Call-To-Action) that are ambiguous, unclear or otherwise uninformative. This is known as “The Ambiguity effect”.

 

 

 

 

THE AMBIGUITY EFFECT/ Daniel Ellsberg (1961)

 

 

 

 

 

The tendency to avoid options for which missing information makes the probability seem "unknown"

 

Ellsberg demonstrated the effect using the following experiment: 

Imagine a bucket contains 90 balls, 30 are known to be Red balls, and the rest an unknown proportion of Black and Yellow balls. A subject is allowed to choose between 2 options: (A) if he draws a Red ball, he wins $100, but if he draws Black or Yellow, he wins $0. Or (B) if he draws a Yellow ball, he wins $100. If he draws Red or Black, he wins $0. 

 

Before you read on, answer it for yourself – what would you choose? Option A, or option B?

 

 

 

1

The Ambiguity Effect

 

 

The probability of drawing a Red ball, if you chose option A, is 1/3.

The probability of drawing a Yellow ball, if you chose option B, is also 1/3. This is because the number of yellow balls is equally distributed among all possibilities between 0 and 60.

 

The results show that most people would prefer to bet on option A, rather than option B, the only difference between the two is that option A has a known favorable outcome, whereas option B has an ambiguous, unknown favorable outcome. People prefer option A because it is perceived to be more certain, even though the two probabilities are equal.

 

Frisch and Baron (1988)   , for example, claim that the effect of ambiguity on decision making highlights the fact that we calculate the optimal decision, given what one knows. People often have a rule of thumb, a heuristic, to avoid choices that lack in information. This is a good heuristic, since more often than not, missing information should be sought out before a decision is made. However, sometimes that information is unavailable, as in the example above.

 

When discussing Decision Making under uncertainty, we can look at the following 5 scenarios: Certainty, Risk, “Black Swan”, Knightian and Radical uncertainty. 

 

 

How can this effect be explained?

 

 

 

 

 

 

2

As we just saw, people tend to avoid unknown probabilities, so you should avoid uncertainty as much as possible. If your product is not clear enough, people will avoid it. If a banner is ambiguous, people will press it less. If a URL has no data, it will reduce engagement. Of course, the reason short URLs were introduced to begin with is because of those long, tedious text strings of URLs.

 

There is a golden path here to be taken, and some of you use it instinctively – branded short URLs.

It can look something like this: https://get.stocks/app. 

 

But if you look at the above diagram, there is one more interesting take-home-message here: the “Black Swan”, or the “Bomb”. These are extreme events that are so rare we usually ignore in taking decisions, but have the potential to destroy everything. Forex companies depend on their customers unheeding the “bomb” that is leverage. People tend to be blinded by favorable outcomes and neglect to see the gaping hole that can swallow all their gamble in 30 seconds. But there is a flip side to the “Bomb”: The “Diamond”. These are extreme events with the potential to win it all. These are tools employed by marketers: promises of getting rich overnight, winning the lottery, meeting the woman of your dreams on Jdate ;) 

 

Since we are in the business of winning the users over, keep in mind these 2 opposites, and use them to your own advantage.  

 

 

1 

2 

Frisch, D., & Baron, J. (1988). Ambiguity and rationality. Journal of Behavioral Decision Making, 1(3), 149-157.

 

Ellsberg, D. (1961). Risk, ambiguity, and the Savage axioms. The quarterly journal of economics, 643-669.

 

eduardo@singulariteam.com

2

1