Now consider this variation. Imagine the bag contains 100 colored chips that are either red or black, but the proportions are unknown. Many people who are willing to gamble when the odds are even prefer to play it safe and take the sure $1,000 when the odds are unknown. This phenomenon is known as the aversion to ambiguity. People prefer the familiar to the unfamiliar.
Remember the Wall Street proverb about greed and fear? I note that the emotional aspect of aversion to ambiguity is fear of the unknown. The case of Long-Term Capital Management, discussed in chapter 1, provides an apt example of this phenomenon. Recall that on September 23, 1998, a $3.6 billion private rescue of LTCM was arranged. The Federal Reserve Bank of New York orchestrated this plan because of a concern that the failure of LTCM might cause a collapse in the global financial system. The November 16, 1998, issue of the Wall Street Journal describes the scene as the participants departed the meeting at which the deal was struck. The article attributes an interesting remark to Herbert Allison, then president of Merrill Lynch, a remark that typifies aversion to ambiguity as fear of the unknown. “As they filed out, they were left to ponder whether all this was necessary, and whether a collapse would really have jolted the global financial system. It’s was a very large unknown; Merrill’s Mr. Allison say. ‘It wasn’t worth a jump into the abyss to find out how deep it was.’”6