​Extract Money From People Using the Ambiguity Effect

Illustration for article titled ​Extract Money From People Using the Ambiguity Effect

Are you comfortable with uncertainty? Are you willing to take money from those who aren't comfortable with it? Then I have just the rigged game for you! Make money from people's uncertainties with the Ambiguity Effect.

Here's a quick game. I have a jar full of ninety marbles. There are thirty red marbles for sure, but there's a mix of black and white marbles, and I can't be sure how many of each is in there. You can choose between one of two games. The first game awards you a hundred dollars if you pick a red marble. The second game forces you to pick either black or white as the "winning color," and awards you a hundred dollars if you pick the marble of your choice.

Most people will pick the red marble game. Knowing their exact odds of winning comforts them. They even pick the red game if it's explained to them that the games have an equal probability of winning them the hundred bucks. To see why the black and white game wins, let's change the game slightly. Instead of picking which marble color wins before you draw, you draw and then flip a coin to see which color wins. So if you've just drawn a black marble, the odds of winning with that marble are fifty percent - the likelihood of either side of a coin flip. And if you've just drawn a white marble, the odds of winning with that marble are fifty percent. Considering the overall odds of drawing either black or white are two-thirds, fifty percent of two thirds is one third - or exactly the odds of winning with a red marble.

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Why is this important? Because of their dislike of uncertainty, people will pay to move from an uncertain game to a more certain one. So you can either charge slightly more money for the red marble game, or work the crowd with a partner. People get assigned on game or the other, and your partner, with the more-desirable red marble game will trade their tickets for a cash bonus to people who don't like their odds (even though they should).

Image: Muffet

Via Ambiguous Probabilities and the Paradoxes of Expected Utility.

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DISCUSSION

prufrocker
chewbacchanalia

Wait, do I understand correctly that there is a varying number of black vs white marbles?

"There are thirty red marbles for sure, but there's a mix of black and white marbles, and I can't be sure how many of each is in there."

If that's the case, then the red marbles would always have a 1/3 chance of winning, but depending on the distribution of black vs white marbles, one of those colors may have a vastly reduced chance of winning, right?

Overall, the three colors would add up to 3/3 chance of winning, but they don't all get there at the 1/3.

Of course, I'm terrible at this kind of thing so please tell me where I've misunderstood.