Ambiguity Aversion leads to a Preference for Established Brands

When considering the factors affecting brand choice, Ambiguity Aversion could potentially be an important one. Ambiguity aversion refers to the behavior of individuals who show a higher preference for lotteries where the probabilities are known than for those with unknown probabilities. If you carry your own toilet paper to the toilet because you are afraid there might not be any, then you are ambiguity averse (as opposed to risk averse) because you don't know the probability of missing toilet paper.  An interesting study  (MWX, hereafter) argue that ambiguity aversion makes consumers more inclined to choose established brands. They suggest that if people have subjective beliefs of the choice described with precise probabilities and ambiguous probabilities, similar beliefs should arise by a choice between two brands that vary in terms of how people perceive the quality of the brands.

They asked participants to choose between the following lotteries:

Lottery A: Receiving €150 with a 150 EUR chance and €0 with a chance of 50 %  

Lottery B: Receiving  €150 with an unknown probability x% and €0  with an unknown probability (1-x)%.

Indifferent between the two lotteries

If participants chose lottery A, then they were considered ambiguity averse. If they chose Lottery B, they were considered Ambiguity Seeking. Finally, if they were indifference between the two lotteries, then they were Ambiguity Neutral.

Participants also had to choose between an established brand and a less established brand in the product categories: Camera, DVD player, TV, Computer, Gel pen, Sports shoes, Rice and Noodle. Some pre-testing helped them find the established brand that was better known and whose perception of quality was higher.

When they collected the data, they ran a test to see if those who are Ambiguity Averse, are more likely to choose the established brand. They found this in 4 out of 8 brands. However, this result doesn’t mean that Ambiguity Averse causes the preference for an established brand, as it could be that some other factor C leads people to be ambiguity averse and makes them choose established brands. In a series of experiments, MWX shows that not only is this effect correlational, but it is also causal, for the 4 brands. 

They claim that such an effect is not likely to be found for fast moving goods while it may be found for others.  One implication of this is that established firms could possibly benefit from product ambiguity and would have less of an incentive to reduce this ambiguity.

The paper by MWX can be found here.

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