A labyrinth with paths to clear and stormy skies, symbolizing decision-making under ambiguity.

Decoding Your Risk Tolerance: Are You an Ambiguity Avoider?

Nico Varela in Business & Economy December 2025 • 4 min read.

"New research reveals how your comfort with uncertainty shapes your financial decisions—and what you can do about it."

In an increasingly complex world, where uncertainty is the only constant, understanding how we react to ambiguity becomes essential. Do you shy away from situations where the odds are unclear, or do you embrace the challenge of the unknown? The answer to this question reveals a lot about your risk tolerance and decision-making style, impacting everything from your investment choices to your career moves.

Traditional economic models often assume that people make rational decisions based on clear probabilities. However, real life rarely presents such clarity. We often face situations where the likelihood of different outcomes is vague, leading to what economists call 'ambiguity.' Recent research in behavioral economics delves into these nuances, exploring how individuals perceive and respond to ambiguity in ways that deviate from pure rationality.

A groundbreaking study, 'Absolute and Relative Ambiguity Attitudes,' sheds new light on these concepts. The study introduces innovative models that represent preferences toward ambiguity, without assuming that people make perfectly logical choices. This approach considers absolute and relative ambiguity, acknowledging that our tolerance for uncertainty can shift based on our current welfare and the context of the decisions we face.

Absolute vs. Relative: What's Your Ambiguity Style?

A labyrinth with paths to clear and stormy skies, symbolizing decision-making under ambiguity.

The study distinguishes between two key attitudes toward ambiguity: absolute and relative. Understanding the difference is the first step in recognizing how these biases might influence your decisions.

Absolute Ambiguity Aversion: This refers to how your overall well-being affects your tolerance for ambiguity. Imagine you're considering a risky investment. If you're already financially secure, you might be more willing to take the chance. However, if you're under financial stress, the same investment might seem too daunting. Research confirms this intuition: as people's welfare improves, they generally become more comfortable with ambiguity.

Decreasing absolute ambiguity aversion means that your 'certainty equivalents'—the guaranteed outcome you'd accept instead of the ambiguous option—increase in a predictable, additive way.
This attitude can be modeled using 'act-dependent variational representation,' suggesting that your aversion to ambiguity changes depending on the specific choice you're facing.

Relative Ambiguity Aversion: This considers how the size of the uncertainty, relative to what you stand to gain or lose, impacts your decisions. For example, a 10% chance of a significant loss might feel less acceptable if you're already in a precarious situation. Conversely, the same risk might be more palatable if you're pursuing a potentially massive reward. The study indicates that decreasing relative ambiguity aversion relates to 'positive superhomogeneity,' meaning that you are consistent in your attitude when the stakes change proportionally.

Embrace the Unknown, Armed with Self-Awareness

By understanding your personal attitudes toward ambiguity, you can make more informed and confident decisions in all areas of life. Whether it's navigating the financial markets, making career choices, or simply managing everyday uncertainties, recognizing your biases is the first step toward thriving in an ambiguous world. Continue to explore, question, and adapt—the journey of understanding never truly ends.

About this Article -

This article was crafted using a human-AI hybrid and collaborative approach. AI assisted our team with initial drafting, research insights, identifying key questions, and image generation. Our human editors guided topic selection, defined the angle, structured the content, ensured factual accuracy and relevance, refined the tone, and conducted thorough editing to deliver helpful, high-quality information.See our About page for more information.

This article is based on research published under:

DOI-LINK: https://doi.org/10.48550/arXiv.2406.01343,

Title: Absolute And Relative Ambiguity Attitudes

Subject: econ.th

Authors: Francesco Fabbri, Giulio Principi, Lorenzo Stanca

Published: 03-06-2024

Everything You Need To Know

What is ambiguity aversion and how does it affect my decisions?

Ambiguity aversion is the tendency to avoid situations where the odds are unclear, a concept central to understanding your risk tolerance. It significantly influences your decision-making in various aspects of life, including investments and career choices. Traditional economic models often assume rationality based on clear probabilities, but real-world scenarios frequently involve vague likelihoods. Understanding your attitude toward 'ambiguity' is key to making smarter choices and improving your financial decisions. This is where behavioral economics provides valuable insights.

What is the difference between 'absolute' and 'relative' ambiguity aversion?

The study 'Absolute and Relative Ambiguity Attitudes' identifies two key attitudes: 'absolute' and 'relative' ambiguity aversion. 'Absolute ambiguity aversion' relates to how your overall well-being affects your tolerance for uncertainty. For example, if you are financially secure, you might be more willing to take a risk. 'Relative ambiguity aversion,' on the other hand, considers how the size of the uncertainty, relative to potential gains or losses, impacts your decisions. For instance, a 10% chance of a loss might seem more daunting if you're in a precarious financial situation. These two concepts help in recognizing how biases influence your decisions.

How does 'absolute ambiguity aversion' change as my financial situation changes?

As your financial welfare improves, your tolerance for ambiguity generally increases. 'Decreasing absolute ambiguity aversion' means that your 'certainty equivalents'—the guaranteed outcome you'd accept instead of the ambiguous option—increase. This suggests that as you become more financially secure, you become more comfortable with uncertainty. This attitude can be modeled using 'act-dependent variational representation,' indicating that your aversion to ambiguity changes depending on the specific choice you're facing.

How can I use the concepts of 'absolute' and 'relative' ambiguity aversion to improve my investment strategies?

By understanding your personal attitudes towards 'absolute' and 'relative ambiguity aversion,' you can tailor your investment strategies to align with your risk tolerance. If you are highly averse to 'absolute ambiguity,' you might prefer less risky investments, especially during times of financial stress. If you are more sensitive to 'relative ambiguity,' consider the potential gains and losses relative to your current financial position before making decisions. This self-awareness can lead to more informed and confident investment choices. The study 'Absolute and Relative Ambiguity Attitudes' provides a framework for recognizing how these biases influence your decisions.

What do 'decreasing absolute ambiguity aversion' and 'decreasing relative ambiguity aversion' mean, and how are they relevant?

'Decreasing absolute ambiguity aversion' means your willingness to accept uncertainty increases with improved financial well-being. Your 'certainty equivalents' increase in a predictable way. 'Decreasing relative ambiguity aversion' is related to 'positive superhomogeneity,' implying consistency in your attitude when the stakes change proportionally. This self-awareness helps you navigate financial markets and everyday uncertainties more effectively. By recognizing these biases, you can make more informed and confident decisions.