Ambiguity Bias
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Ambiguity Bias
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Ambiguity biasrisks and outcomes are clearly knownnot knowing how things might turn outmissed opportunities or poor diversification
A salaried man in Chennai was offered two health insurance plans by his company. The first plan clearly listed hospital room limits, maternity benefits, and cashless network hospitals. The second plan was newer and potentially offered better coverage, but its brochure was vague about exclusions, pre-existing conditions, and claim limits.
Even though the second plan might have been more comprehensive, he chose the first one because it was easier to understand. The lack of clarity in the second option made him uncomfortable, so he avoided it—even if it meant missing out on better benefits.
Ellsberg Paradox
behavioural finance
Definition
Ambiguity biasrisks and outcomes are clearly knownnot knowing how things might turn outmissed opportunities or poor diversification
Case Study
A salaried man in Chennai was offered two health insurance plans by his company. The first plan clearly listed hospital room limits, maternity benefits, and cashless network hospitals. The second plan was newer and potentially offered better coverage, but its brochure was vague about exclusions, pre-existing conditions, and claim limits.
Even though the second plan might have been more comprehensive, he chose the first one because it was easier to understand. The lack of clarity in the second option made him uncomfortable, so he avoided it—even if it meant missing out on better benefits.
Historical Reference
Ellsberg Paradox
behavioural finance
Illustration
