Unknown outcomes can be further classified into risk and uncertainty. Risk applies when probabilities are known, as they are at gambling tables, or for insurance companies that have vast amounts of data on individual risks. Uncertainty prevails when even those probabilities are unknown, as they are for virtually all real-life decisions.
Ignorance is both an enemy and a friend; it imposes big risks, yet offers the possibility of substantial gains. It confronts most of us much of the time, in decisions large and small.
Ignorance describes the state of the world when one has moved from uncertainty to conditions where some potential outcomes are unknowable and not merely unknown (Zeckhauser 2006)
The first challenge in grappling with ignorance is to recognize its presence. A person who suffers primary ignorance has usually failed to consider the possibility of CADs (Consequential Amazing Development). So we start with the suggestion of raising self-awareness.
Our key lesson is that as individuals proceed through life, they should always be on the lookout for ignorance. When they do recognize it, they should try to assess how likely they are to be surprised—in other words, attempt to compute the base rate.
When ignorance is recognized, any of three common biases may emerge:
- Status quo bias.
- Action bias.
- Indecision Bias
- Status Quo Bias (SQB) leads one to stay the course by “doing nothing or maintaining one’s current or previous decision” (Samuelson and Zeckhauser 1988). A psychological explanation is that errors of commission weigh more heavily than errors of omission (Ritov and Baron 1990, 1992). This bias is reinforced when most outcomes are likely to be bad. A switch in strategy that leads to a bad outcome is more susceptible to blame from others, or indeed oneself, than simply sticking with things as they are and doing equally poorly.
- Action Bias (AB) arises when people take actions when standing pat or simply waiting would be preferred in expectation (Patt and Zeckhauser 2000). AB is the converse of SQB. It is likely to operate when most outcomes will be favorable. People seek credit from themselves (as well as others) from taking an action that leads to a good outcome. Often it is not clear what would have happened had they simply stuck with what they had.
- Indecision Bias (IB) arises when one must choose among alternatives, the future is cloudy, and high-magnitude outcomes are possible. Many individuals get frozen with indecision, putting off till tomorrow what should be decided today, particularly when postponement will not secure new information.
It is perhaps a Zen-like axiom that not taking any action is also a form of action. When individuals recognize their ignorance they frequently respond through complete inaction or a state of being frozen with indecision, a phenomenon we label indecision bias (IB). IB is not rooted in the impulse to gather more information; it is, on the contrary, wishful waiting for the situation to resolve itself on its own. At times like this, we might heed President Roosevelt’s (1933) words: “[L]et me assert my firm belief that the only thing we have to fear is fear itself—nameless, unreasoning, unjustified terror which paralyzes needed efforts to convert retreat into advance.” IB, motivated in part by fear of error, is a fundamental affliction.
The recognition of ignorance accentuates difficulties in decision-making among the already indecisive. Too much positive evidence is required before making the switch from a known to an unknown choice (Trautman and Zeckhauser 2013). Thus IB can prove costly. In a situation of recognized ignorance, often a switch from the status quo or some other action yields information that will prove extremely valuable in repeat-choice situations. Yet individuals vastly underestimate or completely ignore this benefit when the action they take is “unable to decide.”