Heuristic-driven biases: 4. Aversion to Ambiguity

4. Aversion to Ambiguity

People are fearful of ambiguous situations where they feel that they have little information about the possible outcomes.

In experiments, people are more inclined to bet when they know the probabilities of various outcomes than when they are ignorant of the same.

In the world of investments, aversion to ambiguity means that investors are wary of stocks that they feel they don't understand. On the flip side it means that investors have a preference for the familiar.

This is manifested in home country bias (investors prefer stocks of their country), local company bias (investors prefer stocks of their local area), and own company bias (employees of a company have a preference for their own company's stock).