This research aimed to explore a novel concept termed “ambiguity vulnerability.” This concept suggests that people tend to be more cautious when there exists background ambiguity, where the probability of the uncertain event is unknown, compared to background risk, when the probability is known.
Empirical evidence supports ambiguity vulnerability, with individuals investing 11% less in situations of background ambiguity than in scenarios involving background risk. The study also establishes a link between utility function shapes and susceptibility to risk and ambiguity vulnerability. Financial stress is identified as a form of background uncertainty, potentially reducing individuals’ profitable investments.
Recognizing ambiguity vulnerability has implications for policy and practice, especially in risk management. Policymakers should consider the psychological impact of uncertainty when designing interventions, particularly in financial contexts. Addressing factors contributing to ambiguity vulnerability, like financial stress, could enhance decision-making and promote more profitable outcomes for individuals.