Why Uncertainty Makes Us Less Likely to Take Risks

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When outcomes are uncertain, people veer away from risk. | iStock/Olaser

In 2016, solar power became the world’s cheapest form of energy, entering “the era of undercutting fossil fuels,” according to the chairman of Bloomberg New Energy Finance. So why, one might wonder, wasn’t there a Black Friday–style stampede on solar installers?

In part, for the same reason that people don’t reliably save for retirement, or eat healthily, or exercise three times a week. Our willpower diminishes when the outcome is ambiguous. “People really want to avoid uncertainty,” says Jeffrey Pfeffer, a professor at the Stanford Graduate School of Business. An investment in solar panels is inherently uncertain. Healthy eating is too: Will one more plate of fries really matter?

In a new study with David Hardisty, a former Stanford GSB professor, now at the UBC Sauder School of Business, Pfeffer found that people overwhelmingly opt for certainty, regardless of whether that certainty is in the present or the future, or whether it pertains to gains or losses. Interestingly, these findings break with a foundational theory of behavioral economics first outlined in 1979.

Prospect theory, as it’s known, asserts that when there is something to be gained, we tend to choose certainty over uncertainty. For instance, given the choice between a guarantee of receiving $100 or a 50% chance of receiving $200, most of us will opt for the smaller but certain payoff. But when it comes to losses, we’re more willing to roll the dice and opt for uncertainty. Using a similar example, most of us would choose a 50% chance of paying a bill of $200 (the riskier option) over the certainty of paying $100 instead.

These contrasting preferences have been replicated hundreds of times by hundreds of researchers across myriad contexts, which is why Hardisty and Pfeffer were puzzled by results at odds with the theory’s predictions. By injecting temporal considerations into the equation, the researchers found that even when people face losses, they favor certainty over uncertainty.

“We didn’t discredit or disprove prospect theory,” Hardisty hastened to say. “But it was surprising that the results didn’t hold.”

Their experimental setup was straightforward. In one condition, survey participants were offered either a guaranteed monetary reward in the present or an uncertain but larger reward one year in the future. Hardisty and Pfeffer offered the same choice with a loss instead of a reward: guaranteed loss in the present or uncertain but larger loss in the future. Prospect theory predicts that people would be inclined to gamble on a larger future loss. But, in both cases, whether they faced gains or losses, participants opted for certainty in the present.

A separate condition used the same setup but flipped the timeline: Uncertain gains and losses were placed in the present and certain gains and losses one year in the future. In this case, participants opted for the future’s concrete gains and losses.

“Whether or not we prefer the future or the present, whether or not we delay our choices, depends in large part upon the uncertainty of what we face,” Pfeffer says.

This finding raises an interesting consideration for people who make or advocate for any kind of long-term thinking. If an investment adviser would like people to put more money into retirement, or if a government would like to encourage investment in energy efficiency, it could be useful to highlight the uncertainty of not taking those actions. “You may be able to lightly push people around in their preferences,” says Hardisty.

The same is true in a company: If, say, a business leader thinks that more time is needed for a successful new product launch, she might emphasize all of the questions left unanswered if the release is rushed. “This kind of framing could hopefully be used to encourage long-term decision-making,” Hardisty says.

Explaining why people hold a preference for certainty is more complicated. And while Pfeffer and Hardisty didn’t make this a core part of their research, they did reveal a tentative finding. In part, people appear to be averse not simply to uncertainty but also to the complexity attached to it. Without even realizing it, participants in each experiment were mentally balancing different probabilities, time horizons, and reward-loss ratios — a complicated task.

“People really don’t like the complexity and cognitive load of making decisions under uncertain circumstances,” says Pfeffer. The choice for a sure bet, he says, may be the mental equivalent of shrugging in resignation.

Hardisty, who spearheaded the project, hopes to look next at how people deal with uncertainty when the circumstances are more realistically ambiguous. After all, the vast majority of decisions we make don’t come labeled with percentage likelihoods.

“In real life,” he says, “uncertainty is more often implicit.”