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NTU Management Review Vol. 36 No. 1 Apr. 2026

1. Introduction

From firm managers to individual consumers, people usually make decisions under
uncertainty in a changing environment. Uncertainty can come from different sources.

When making a decision, one may not know the outcome before it is realized, but may
know the probabilities of different outcomes (the outcome distribution). In this case, one
faces a risk, as the outcome is uncertain. In other cases, in addition to the uncertainty of
the outcome, the outcome distribution may also be uncertain. Then, the individual faces

ambiguity in decision-making.
Ambiguity, first defined by Knight (1921), commonly refers to a situation where
probabilities are unknown or not perfectly known. Uncertainty is not limited to the
outcome distribution (probabilities). For example, it can relate to the distribution of

the information affecting a decision, such as the default probability of a counterparty
involved in a contract (e.g., Peter and Ying, 2020). In this case, the ambiguity concerns
the uncertainty of the insurer’s nonperformance probability. Another example is a
parameter that determines the outcome distribution (e.g., Illeditsch, Ganguli, and Condie,

2021), where the ambiguity concerns the uncertainty of the correlation between a value
distribution of a risky asset and the sign indicating its value. In the face of ambiguity,
people tend to behave differently from a subjective-expected-utility (SEU) maximizer.
For example, most people choose a prospect with certain payoff probabilities instead

of one with uncertain payoff probabilities. This preference is called ambiguity aversion
(Ellsberg, 1961). Recently, the preference of partial ambiguity aversion has been proposed
and found from the experiment (Klingebiel and Zhu, 2023). This preference describes that
the attitude toward ambiguity does not consistently exhibit over all degree of ambiguity

but will switch from seeking to aversion toward ambiguity at a threshold of degree of
ambiguity.
The influence of ambiguity aversion on decision-making under ambiguity has been
documented in the literature on insurance markets. One of the noteworthy issues is the
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1 In addition to the insurance markets, some recent papers have also found that ambiguity aversion
can explain firms’ decision of leverage (e.g., Izhakian, Yermack, and Zender, 2022) and the positive
relationship between risk and return in stock markets (e.g., Ghazi, Schneider, and Strauss, 2025).

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