Ambiguity by Design

Investing at the Edge of Knowledge, Part 2 · Start with Part 1 Ellsberg’s urn experiment is one of the cleanest results in decision theory. Daniel Ellsberg (1961) put two urns in front of subjects. Urn A: 50 red balls, 50 black. Urn B: 100 balls, red and black, ratio unknown. Pay $100 if you draw the right color. Most people chose Urn A, the known 50/50 bet. Fine so far. But here’s the problem: they chose Urn A regardless of which color they were betting on. Bet on red? Prefer Urn A. Bet on b...