Ambiguity Aversion

Supported by Greenhaven Road Capital, finding value off the beaten path.

How does someone make good decisions? There’s a lot of smart people talking about it and we’ve written about a number of them here. Michael Mauboussin, Nassim Taleb, Rory Sutherland, Gerd Gigerenzer, and Richard Thaler all come up on this blog. Part of what makes decision making difficult is the destination.

Diet is an easy example. The destination is a healthy body. The decision is to replace unhealthy foods with healthier ones.

Diet is easy (kinda) because it’s a kind rather than wicked environment. As David Epstein spoke about, some sports like golf and chess are very stable. Other parts of life are much more complex. Epstein’s point was that we shouldn’t learn lessons that work in one area but are void in another.

Diet is kinda kind because it’s a lot of chemistry with some social and some psychology mixed in. This is why diets tend to work with design interventions. Penn Jillette ate just a potato and fasted and that worked. Coaching solved the design issue while chemistry took care of the weight.

Let’s look at something different. Let’s look at something common in harder decisions, ambiguity.

Scott Kelly successfully spent a year in space and wrote about it in the book, Endurance. Kelly and his twin brother Mark had a rough life growing up. Part of the reason was that his family was middle class trying to live an upper-class lifestyle. Part of the reasons was his father was a drunk. One night dad went out to the bars with no food or money at home. Kelly wrote:

“The physical feeling of hunger is horrible, but much worse is the bottomlessness of not knowing when it will end.”

Later when Kelly was on the ISS there were some launch accidents. Their supply ships blew up on the launch pad or malfunctioned and burned up in the atmosphere. The ISS has a safety gap in supplies and redundancies in machineries but there was still the doubt about when the next capsule would make it up.

When there’s ambiguity for loss – how many people would really want to live in space for more than a year? – we tend to shy away from it. When there’s ambiguity for gain we can place Small Bets.

Rory Sutherland notes that we like brands because it’s insurance that something isn’t shit. Buying brands limits ambiguity. We buy brands because risks are calculated in the pre-frontal cortex whereas ambiguity is in the limbic systems, “said a simpler way, with ambiguity emotions play a much more significant role in the process than they do with risky decisions or deductive decisions.”

The lesson then is to make small, non-lethal bets, even if it costs a lot, in areas that are important to us. Buy the damn Samsung TV but take risks on anything that can compound over time like financial, habitual, or relational. Bill Gurley said about missing Google:

“I think it came down to the price at the time was remarkably high and the team was remarkably self confident in a way that would cause you to question whether they could pull it off but they did. I go back and the learning is that if you have remarkably asymmetric returns you have to ask yourself, ‘how high could up be and what could go right?’ because it’s not a 50/50 thing. If you thought there was a 20% chance you should still do it because the upside is so high.”

Humans don’t like ambiguity. It shields us from some mistakes, but it also conceals some gems.

Thanks for reading.