The Ambiguity Effect describes the tendency people have to avoid options with unknown results, or about which they lack information. Decision-making is affected by lack of information and ambiguity: people tend to select options for which the outcome is more certain – even if it isn’t necessarily the most advantageous outcome - because they prefer surer things. The concept is expressed in the proverb: "Better the devil you know than the devil you don't". It is therefore more likely that someone will choose to invest their time or money in an action for which they already know the outcome than in one that is uncertain or ambiguous. In other words, people avoid doing things or making choices they know less about. This results in a reluctance to try new things and a limited ability to recognise long-term benefits of riskier decisions compared to marginal gains from safer choices.

The Ambiguity Effect was first studied by Daniel Ellsberg in 1961, where he conducted an experiment now known as the “Ellsberg Paradox”. The experiment offered participants the chance to play a game in which you have to blindly draw a ball from a box and guess its colour to win $20. You can choose to draw your ball from one of two boxes: one contains 50 red balls and 50 green balls, whereas the second contains 100 red and green balls in an unknown proportion. The results showed that most people preferred to choose from the 50/50 box as, even though not knowing the distribution of ball colours in the second box meant they couldn’t know whether 50/50 would be a more advantageous box for guessing, they preferred to make use of the information provided - even though it couldn’t aid the likelihood of them winning - than to go with the more ambiguous alternative.

The Ambiguity Effect should be taken in to account for marketing strategies as, if a potential buyer knows less about your company than they do about a competitor company, they are more likely to go with your competitor, simply because they will feel more informed and therefore as though there is more surety in giving their business to this company. Therefore it is important to opt for a strategy that places importance on clarity and providing information to ensure that the Ambiguity Effect doesn’t result in lost business.