ambiguity aversion

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Hyundai’s marketers have already shown that they understand behavioral economics. They are at it again with this commercial, capitalizing on our aversion for ambiguity. The basic idea is that people show a preference for known risks instead of unknown risks. The original experiment illustrating ambiguity aversion is the Ellsberg paradox. A version of this paradox is a situation featuring an urn with 50 red balls and 50 black balls, and another urn that also has 100 balls but where the exact number of each color is unknown. Most people prefer the urn with the known probabilities of pulling a red or a black ball.

So how has Hyundai adapted that idea to sell cars? A used car is worth less than a new car. That’s obvious. But how much less? Most customers have no idea, and finding out would take a lot of work. They are facing an ambiguous urn. Hyundai, however, has a lot of data about their cars. They also have a lot of smart statisticians who can forecast future used car values. Hyundai’s urn is less ambiguous. Although it could try to turn its knowledge of the used car market into a urn with known odds, the company decides to go a step further. It just tells consumers exactly what the outcome will be.

As the commercial says, “Nobody likes what happens to the value of that new car when they drive it off the lot.” With or without the program, the value of a new Hyundai is going to drop by some amount. Customers know that and accept it – even if they don’t like it. So Hyundai can make the present purchase decision easier by eliminating the future uncertainty about the size of that drop. The company has cleverly swapped an unknown risk for an absolute certainty, and made the new car “gamble” more attractive.

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If you are a loyal viewer of the Next Iron Chef on the Food Network you may have noticed an interesting real-life example of ambiguity aversion on Sunday night’s episode. The term ambiguity aversion refers to a preference for known risks instead of unknown risks. The original experiment illustrating ambiguity aversion is the Ellsberg paradox. A version of this paradox is a situation featuring an urn with 50 red balls and 50 black balls and another urn that also has 100 balls but where the exact number of each color is unknown. Most people prefer the urn with the known probabilities of pulling a red or a black ball.

Four chefs remained at the start of last Sunday’s episode. In preparation for their final challenge, each chef was given the chance to select a locked safe with a “special luxury protein” inside it. The first three chefs to pick choose safes, which were opened to reveal lobster, wagyu beef, and moi fish. (A photo of host Alton Brown holding up the moi fish is here.)  The final chef to pick, Marco Canora, had won an earlier challenge in the episode for which he was awarded the following “advantage”: He could take one of the three proteins already revealed away from the chef who had picked it, or opt for the final mystery luxury protein in the remaining locked safe.

Keep in mind, this episode marked the semi-finals of a show designed to pick an actual Iron Chef and all of the proteins were advertised as “luxurious.” Canora had to know that the likelihood of opening the safe and finding ground round was clearly very, very low. Still, faced with the ambiguous protein in the locked safe versus the known three options, Chef Canora went with the wagyu beef. The chef he took it from, Ming Tsai, ended up with the mystery protein, mangalitsa pork, which derives its extra flavor from better marbling and fat quality than standard pork. Both chefs said they were happy with the outcome.

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