The effect of ambiguity on judgment and choice

A great deal of research demonstrates a variety of ways in which people\u27s judgments violate the laws of probability. This set of phenomena has been labelled cognitive illusions. Who do people suffer from cognitive illusions? The predominant account is that in estimating probabilities, people rely on a small set of heuristics. Although these heuristics often lead to the correct answer, they also lead to systematic errors. I present an alternative account of cognitive illusions, one based on an analysis of the different functions served by probability in reasoning. I argue that violations of probability theory arise for four distinct types of reasons: people\u27s failure to accept or understand the concept of subjective probability; combination errors; erroneous statistical intuitions and non-statistical errors in thinking. I present an analysis of one particular violation of probability theory: the ambiguity effect. The ambiguity effect refers to the finding that people prefer to bet on gambles when the chance of winning is known, than when the chance of winning is unknown. I argue that the ambiguity effect arises from the perception that one is missing information relevant to a prediction. In a series of experiments, I present empirical evidence supporting the claim that ambiguity can be manipulated by varying the salience of missing information. I show how this view of ambiguity can provide insights into the reasons ambiguity affects decisions in the ways it does and can help resolve the controversy about whether the ambiguity effect casts doubt on the normative status of utility theory