Seonglae ChoUncertainty where the probabilities themselves are unknown
A concept that emerged when economist Frank Knight distinguished risk from uncertainty
Ellsberg paradox
If an urn holds 30 red balls and the remaining 60 are black or yellow in an unknown proportion:
- Probability of red = 1/3 → risk
- Probability of black = ? → Knightian uncertainty
People generally prefer known probabilities over unknown ones, which is called Ambiguity aversion.